The Global Gold Pool & Resources

By Neil Charnock
www.goldoz.com.au



A little history and educated guess work…
Back in the 60’s nine Central Banks cooperated to sell gold in order to suit their own purposes at that time and this operation has become known as the London Gold Pool. As history tells it the French CB eventually broke rank and began to buy gold but this was not before thousands of tonnes were sold over a period of years. Were “they” – the Central Banks successful? Well my answer is yes and no which is not totally conventional gold analyst opinion. I believe they were successful to a point and that history is repeating at present - and this is why…

“They” managed to hold down gold’s image at the time, it bought them time in “the greater monetary scheme” of things as gold was pouring out of the USA at that time upsetting the underlying asset base under the world’s reserve currency – the mighty Greenback. You have to look deeper at “their” (CB’s, the shareholders of the CB’s – the Government and private interests too) overt motives and hidden (covert) motives as well. I can only guess at the latter covert motives from a logical viewpoint.

But first the overt motives – money, gold (was “official” money at the time) and trade flows were changing direction ahead of the end of the Bretton Woods Agreement that had held since 1944… a new era was approaching and this was prepared for in advance – by those that saw what was coming. The gold was changing hands rapidly and this flow of metal from the US undermined global currency stability. The US and UK interests obviously pulled strings or leaned on the member Banks for help to supply the demand for gold – but look at the timing. In just a year or two we saw the beginning of a new money printing era where the world began a “fiat” experiment of extreme proportions.

Students of the fiat monetary experiments of history know full well that prior experiments all failed dismally so why a global experiment. One would think it crazy to even try this course when it has always ended in grief. Yet these smart and powerful players have done just that. Are they stupid? Oh no - quite the opposite. But debt creation and greed are not the only factors - this would be too simple. Hindsight is like having huge six foot rear vision mirrors – but take a look what happened next over the coming decades… now passed and look at the big picture and trend. Global growth!!! A bigger game has emerged that would not have been possible under the gold standard.

My view is that the wealthy bought that gold it the mid 60’s to the mid 70’s- it mostly ended up in the hands of the super rich elite. These investors are brilliant and in a unique position to see the future and to some degree control timing of events through influence. I am not saying they are all powerful or any thing about a conspiracy, I am saying their influence is very great and that they are very smart operators. This is the yes part of my theory – the gold was supposed to shift ownership; the rich were getting set for the inevitable rally to come once gold broke free. The no part is obvious – gold cannot be held down when trouble arrives as demand for an incredibly rare commodity surges. It surges in response to adverse conditions that are well documented and it steadily rises over time due to normal demand factors as the world becomes economically Westernized – rising income standards create demand for more jewelry for instance.

Things did eventually get out of control and inflation and fear had to be reigned in which happened in the early 80’s after gold went ballistic in response to the adverse conditions at the time. Certain methods were used then, very high interest rates for one – which might not be prudent today for the sake of continuation of the game we now call globalization.

Global growth:
Deals had been done with China in the 50’s with documented WTO leaders photographed shaking hands with high ranking officials in China. Manufacturing had already begun the global shift to Asia (beyond Japan in a big way) and the USD was about to change in nature with the end of the gold standard…and the mass creation of fiat money supplies combined with the proliferation of debt were about to begin a long upward cycle.

The additional money supply to come allowed for a new and unprecedented phase of global growth to coincide with the demands for capital and money creation in the Western economies. This rapid money creation is still in effect to date however this has gradually taken a different turn - history also tells us what happened to gold from the early and mid 70’s. So the CB actions were successful in my opinion, they are not the fools as portrayed by some, even today, it is all calculated. So is the current wild cycle of debt and money creation – I can’t tell you why because it has not unfolded exactly as yet but you can count on there being a reason in the wider picture.

Will it get out of control as it did in the late 70’s? Yes probably, chaos is still part of the bigger picture because there are more than one group of very large market forces. Proof in point is the global struggle for power, there would not be such a struggle if one group controlled all would there?? Another point is that if one group was in power there would be relative quiet, no struggle except for challengers. Debt and monetary growth appear to be out of control again as it was by the latter half of the 70’s and the potential “perfect storm” as it has been so well coined – is looking more and more inevitable.

Anyway I digress – under the gold standard global credit growth would not have possibly allowed for globalization – broad coordinated international growth. Remember money growth was basically 2 – 2.5% under the gold standard which equaled the amount of new gold supply per annum via mining activities. The UK, later the USA then Japan were all great examples of long term growth cycles of an economy, Japan the latter and therefore the most up to date. The roll out of infrastructure and industry and manufacturing might – all consumes massive quantities of commodities over decades not just a few years. Credit creation growth at the rate of new gold mined under the old standard would just not have worked. So the long term debasement of the USD since the end of the gold standard in 1971 has worked out too. Not for many demographic groups in the population which are constantly over looked. (We have to look after ourselves and don’t expect market forces or Government to do that so get savvy if you want to survive in comfort). But the gold shifted hands before a massive global change and that was stage one of the giant long term change we are still seeing unfold.

Now up to recent and present time - it is obvious we have had a concerted effort by Central Banks to manage the price of gold since the end of the mid 90’s and we are now at the end of the mid 00’s and gold has found a new higher base line support at US$650. This is the Global Gold Pool – as Colin Emery says “the song remains the same”. Same story as the 70’s and once again the gold has changed hands already. The growing and coming demand from a new world; with rising living standards in Asia – a traditional cultural support for gold. What is unfolding and how are these long term cycles unfolding in the near term? To work this out is to potentially generate fantastic investment returns over the next few years.

Looking at these cycles from this long term perspective – it seems obvious why these markets “keep on keeping on” despite the obvious growth pains and disequilibrium the show has gone on. It is about global growth and inflation of monetary supplies and combined growth in infrastructure roll out in several extremely large population centers = commodity boom of unprecedented proportions. Japan was minute as compared to the voracious appetite for resources from China and India + Brazil + Russia combined. Combine this with the roll on effect on the EU Zone, Australia (demand for resources), Africa (demand for resources), the Middle East (demand for oil).

As this rolls on through into the 2010’s we will see continued inflation too and rising demand for gold and resource wars… continuation of the trend. I agree the USD is rubbish, debased confetti but compared to the other rubbish illusory fiat confetti’s on offer - it is not so relatively bad. If the USD was the only un-backed fiat currency then I would totally agree with the theory of the imminent demise of the USD and that we have to face the consequences that would bring.

Forget about it until things DO get out of hand because you will miss the resource party in the meantime. It is not a straight line up and it has been punctuated by short sharp dips this year but I have been extremely impressed by returns and activity over the last quarter. To be honest I have not had my eye on US or Canadian stocks so I have no comparison – it has been unusually hot here despite the long painful grind sideways in gold and silver.

Poly-metallic stocks – diversified resource stocks are an excellent proposition. I am talking about the big two RIO and BHP but more to the point we have resource opportunities in the smaller producer categories and developers – even leading explorers that have amazing futures as this resource boom unfolds. Australia is being bought up by Chinese off-take agreements as they look to supply anticipated demand. Demand they know is to come based on their own plans and they are doing the same thing with Africa.

This is global market place and every nook and cranny is needed to supply the greatest infrastructure boom in history. By preference I prefer to invest my own money in the safer regions as defined by sovereign risk - however I have seen recent examples of even large companies running 70% in the last couple of months here in Australia.

I was contacted by a gold mining executive this last week and he noted that during his extensive overseas travel he often gets the impression that Down Under means “Don’t Understand”. Like or not Globalization is with us and has been for a few decades now. Australia is one of the key mining destinations for the long term Asian infrastructure roll out and global construction boom. That particular company has an absolutely state of the art underground operation – a gold mine set to expand, debt free, no hedging and long mine life. My business it to make the truth about this opportunity well known and see to it that as many people as possible find out about this.

Gold too – rising over time but forget about the “big one” until things DO get out of hand. Gold will be strong in the meantime – it will stay strong and inflation will see to that – so will rising normal demand from Asia, particularly China and India. The gold stocks will do very well as the gold and silver prices rise naturally, fits and starts as we have seen... long term trend! The capital raising and exploration activity is sufficient to keep up the excellent drill intersections – another case in point is a small $50M cap stock that just ran from 12c to 21c in a matter of days on two drill holes below their current ore extraction activities. All this in late May during the end of a corrective phase – this action is telling me the second half is going to be very profitable here Down Under.

I will give you another example – you should know about it… a zinc, lead, silver producer that is run by a top rate professional management team, expanding their production into under utilized plant and expanding operations. Last year they were the leading resource performer on the ASX and ran from about 80c to about $5.80 – a 625% gain. They have since corrected and you would think they might still be expensive after such a run – a P:E of 20 maybe??? No – I just bought in recently again at just over $4.10 and their current P:E is under 5. Something wrong with them you ask – not at all they have a very healthy cash balance with approximately 20% of their current $820 M market cap in the bank. They have no debt, strong cash flows and… as I said, a strong growth profile. Profits are set to go up and so is their cash balance. Expensive expansion plans you ask??? Wrong again – all low capex (capital expenditure).

Current gold and silver comment:
Gold failed to reach my target in May as it failed to rise above US$700. It is following a course I did expect however, and this was clearly stated… gold not to really get underway until the second half of 07 so I see choppy conditions ahead. Choppy meaning a volatile sideways consolidation as gold readies it’s self for a stunning rally from these levels. Just as we saw the last up-leg take gold violently higher, so we will see this again. Sentiment is low which is exciting, the hit rate at Kitco is low and yet physical demand is excellent at the dips in this price level. The market has adjusted to the $650 level as the POG consolidates here. Silver is at a critical level and I could only wish it briefly falls so I can buy more!

It can be hard to trade with some offshore brokers and there is a time delay factor however there are specialist brokers that take the trouble for their lucky clients and you can find them. Please do this yourself if you wish to join this party – a simple net (www) search should work and I am overloaded as it is. So how are the current conditions here at present?

Don’t you love volatility… I just enjoyed the best weeks trading in some time, up nearly 10% overall and it is all due to a number of factors such as;

1. Knowing the overall direction of the market – harvest and buy is the name of the game in an uptrend. I mean knowledge of the direction of the metals and the market.
2. Having an in depth knowledge of the resources sector – you cannot do without information and knowledge. Broad understand is the name of the game so you need an overview of lots of companies and specific knowledge about each one; their growth prospects, their financial position and their balance sheet data.
3. Confidence – only comes from practice and a valuable second opinion helps… it creates and enforces a positive attitude.
4. Technical ability – whether your own or purchased from an expert.

The current volatility is being caused by nervous investors… the sell in May and go away jitters versus value investors that are looking to the second half of 2007 and beyond. Throw in some weighting changes by the funds - from the banks back to resources and some pre - end of financial book balancing = action.

I cashed in all my non core investments, just for this - a few weeks back and have been a little nervous about the chances of an overall market pull back – a rest mind you not a crash. This is still possible however, as I pointed out in a recent article some of our resource stocks are just too cheap – P:E ratios as low as 5 for large cap stable miners is just too good to pass up. As I said – words to the effect that there are always stocks set to rise. I have included a chart of our Metals and Mining Index right out of the Weekly Gold Oz Newsletter. Have a look at the action from January this year.

I wrote an article in early January about money flow direction being a key to who will make the money this year – here is a link and let me assure you from the chart you see below - there is an obvious flow in this direction. www.kitco.com/ind/charnock/jan102007.html

We have been patiently waiting for a decent correction to place a broad spread of trades and we still wait in vain. We hope this will come to pass during June so we can get set for H2 2007. We are gearing up for an exciting time. I have been a long term market watcher and the current stock behavior excites the trader and investor in me. Resource stocks are still very cheap Down Under, production and activity has been rising and there is quality here - ripe for the picking.

Here is the 17 month chart – only slightly out of date (one week) to protect the interests of our subscribers, and minus Colin’s expert commentary however… a picture is worth a thousand words as they say.



If you have not yet gotten a complete education on the ASX resource stocks I have just completed an update of 310 stocks, convenient thumb nail coverage of each and many with charts. All sorted into categories and a fantastic tool for investors to find a rich short list of near term winning stocks. It is available on the web site for AUD$30 or a special offer for an annual subscription is still available for the last few subscribers for AUD$99. It has helped me spot 20%, 30% and even up to 80 % gains in the last few weeks. If you are interested go to www.goldoz.com.au there are many changes and advances to the site with even more to follow.

Some investors prefer specific buy and sell advice and would be better suited to our Weekly Newsletter which covers the metals by themselves, the ASX S&P 300 Metals and Mining Index as above and a range of resource stocks every week. All written by a leading elite level trader; with comprehensive international expertise in metals trading, Forex and Resource Stocks. Last few discount subscriptions are still available before we move to full price shortly.


Good trading / investing.
Regards,
Neil Charnock



Neil Charnock is not a registered investment advisor. He is a private investor who, in addition to his essay publication offerings, has now assembled a highly experienced panel to assist in the presentation of various research information services. The opinions and statements made in the above publication are the result of extensive research and are believed to be accurate and from reliable sources. The contents are my current opinion only, further more conditions may cause my opinions to change without notice. The insights herein published are made solely for international and educational purposes. The contents in this publication are not to be construed as solicitation or recommendation to be used for formulation of investment decisions in any type of market whatsoever. WARNING share market investment or speculation is a high risk activity. Investors enter such activity at their own risk and must conduct their own due diligence to research and verify all aspects of any investment decision, if necessary seeking competent professional assistance.