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BANKERS
in a
JACKSON HOLE
Wh at t o d o ? Pr i n t o r d i e !

Investment Indicators from Peter George

Tuesday, October 7, 2008

SUMMARY..................................................................................................................................................................4
1.0 THE BANKERS MEET.......................................................................................................................................6
1.1 ONE MAN’S MEAT….ANOTHER MAN’S POISON.................................................................................7
1.2 WORLD ECONOMY AT A ‘TIPPING POINT’ ..........................................................................................9
1.3 COLLAPSE OF THE US SUBPRIME MARKET.......................................................................................9
1.4 CONTAGION SPREADS TO EUROPE AND THE REST .....................................................................12
1.5 HOW BAD CAN IT GET IN THE US?.......................................................................................................14
1.6 THE LIMITS OF MONETARY POLICY ....................................................................................................16
1.7 IS IT TIME TO ABOLISH THE FED?........................................................................................................18
1.8 AN EMERGING RESCUE STRATEGY ....................................................................................................20
1.9 PRINTING VERSUS BORROWING..........................................................................................................24
2.0 A PROPHETIC CONCLUSION ...............................................................................................................25
2.1 PROPHETIC SHORT TERM PROSPECTS FOR GOLD.......................................................................26
2.2 THE COLLAPSE OF CAPITALISM ..........................................................................................................26
2.3 AN IRANIAN CLIMBDOWN BY CHRISTMAS? .....................................................................................27
2.4 ZUMA WILL NEVER BECOME PRESIDENT OF SOUTH AFRICA...................................................27
2.5 A PROPHETIC FUTURE FOR THE SOUTH AFRICAN RAND ...........................................................28
2.6 PROPERTY PRICES IN CALIFORNIA – A REBOUND POSSIBLE? ................................................28
2.7 A NEW VEHICLE WILL EMERGE FROM FORD ...........................................................................28
2.8 CHINA TO BECOME AMERICA’S FRIEND............................................................................................29
3.0 LATEST ‘PICK SIX’ – IN GOLD AND ENERGY..................................................................................30
3.1 WHY SHOULD GOLD TAKE OFF OR COMMODITIES RECOVER? ................................................31
3.2 LATEST NEWS ON THE WRITER’S ‘PICK SIX’ ..................................................................................33
(1) AFGOLD – Current price R1.75 ($.20) – Projected end April 2009, R3.10 ($.44) based on
gold rising from $840 to $1300 and the Rand strengthening from R8.50/$ to R7.00/$. ..............33
(2) RANDGOLD – Current price R13.00 ($1.53) Projected end April 2009 R26.00 ($3.71) based
on gold rising from $840 to $1300 and the Rand strengthening from R8.50/$ to R7.00/$. ........34
(3) GOLDFIELDS - Current price R70.25 ($8.26) Projected end April 2009 R135.00 ($19.28)
based on gold rising from $840 to $1300 and the Rand strengthening from R8.50/$ to R7.00/$.
...........................................................................................................................................................................35
(4) SALLIES - Current price R0.64 ($0.08) Projected end April 2009 R1.10 ($0.16) based on a
sharp recovery in prospects for the world economy and therefore the prices of all
commodities. SALLIES sneaks in as an energy stock because it is used in the uranium
enrichment process.....................................................................................................................................36
(5) SASOL - Current price R314.00 ($36.90) Projected end April 2009 R475.00 ($67.00) based
on a sharp recovery in prospects for the world economy and therefore the prices of all
commodities, PARTICULARY oil..............................................................................................................37
(6) URANIUM ONE - Current price R15.50 ($1.82) Projected end April 2009 R37.00 ($6.40)
based on a sharp recovery in prospects for the world economy and therefore the prices of all
commodities, PARTICULARY oil and uranium.....................................................................................37
CONCLUSION TO THE ‘PICK SIX’ - A LAST MINUTE ENTRANT! ..............................................................38
(7) CONVERGENET - - Current price R1.10 ($0.13) Projected end October 2009 R2.40 ($0.34)
based on a rising stream of infrastructure contracts throughout Africa. .....................................38
A FINAL NOTE ........................................................................................................................................................39
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Issue
No.84

BANKERS
in a
JACKSON HOLE
What to do? Print or die!
Investment Indicators from Peter George
Tuesday, October 7, 2008
Scripture
“Surely the Sovereign Lord does nothing without first revealing his plan to his servants
the prophets.”
Amos chapter 3, verse 7
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SUMMARY
The world is entering a time of severe economic trial and intense political tribulation.
There are options on a number of fronts which make forecasting unusually difficult.

A. Global markets are under intense stress and face huge risks. In the absence of
ground-breaking monetary and fiscal interventions, the international banking
system could implode under an avalanche of defaults. In a worst case scenario it
would trigger a depression exceeding that of the 1930’s. The actions required
could spell the end of capitalism as most have come to know it. While restoring
confidence in world markets, they could also dramatically boost demand for gold.

B. On the political front, events in Georgia have caused a serious deterioration in

the relationship between Russia and the West, reminiscent of the Cold War of
the nineteen eighties. Simultaneously, Iran has declared an intention to proceed
with her nuclear plans regardless. These are suspected to include the building of
a bomb, in defiance of long-pursued efforts by the UN to craft a compromise
accompanied by significant economic incentives. These have now been rejected.
The next step logically requires joint pressure from Russia and the West working
in concert. Russia initially deferred any meeting, claiming other priorities. She
later recanted as Europe applied pressure to expel her from the G8. A
breakdown would leave the US no alternative but to act alone. It would definitely
include the possibility of her having to launch a pre-emotive strike to destroy
Iran’s offending installations in situ. In the absence of the US taking such an
initiative, Israel herself might be forced to act in isolation. French President
Sarkozy warned as much. With Russia now back in line, Iran faces imminent
humiliation and increasingly painful sanctions. Either way she has it coming.
Watch oil. The price could easily retest the mid-July all-time high of $147.

C. On the South African domestic scene, attention is focused on two Z’s. The first
stands for the country’s northern neighbour, Zimbabwe, suffering from runaway
inflation, widespread starvation and rampant political abuse. A shaky solution
may have been reached but it’s nowhere near being a ‘bankable’ proposition.
Foreign investors remain unimpressed. It will eventually happen, but not yet.

The second ‘Z’ represents the issue of Zuma. The dramatic ousting of President
Mbeki, took arch enemy Zuma by surprise. Not being an elected Member of
Parliament, he was unable to fill the gap himself. Instead he was forced against
his better judgement to allow his colleague and party vice-president, Kgalema
Motlanthe, to take his place until elections in April/May 2009. Unfortunately the
man’s humble nature, wisdom, and early leanings as a full time Anglican priest,
might soon endear him to the party. Even before being appointed, he
courageously spoke out against ANC Youth League ‘big mouth’, Malema when
the latter insulted Mbeki. Will South Africa eventually have to hand leadership of
the country to a muddied individual like Zuma – a person who goes to any length
to evade his day in court? Or will justice finally take its course by forcing a full
investigation of the Arms Deal? That’s what Judge Nicholson has called for. If
events conspire as forecast, interim President Kgalema Motlanthe could easily
garner sufficient support to become the nation’s next President.
 5

What affect will the above scenarios have, first on the prices of gold and commodities,
second on South Africa’s political and economic future?

After endeavouring to analyze each of the above THREE topics, the writer will present
the outcomes he believes are most likely. These will initially be analytically determined.
Thereafter the writer will support his predicted outcomes with independently obtained
‘prophetic’ confirmations. In doing so he will draw on sources he has found reliable in
the past. Absolute certainty in the realm of the prophetic will always remain elusive but
could nonetheless introduce an interesting and unusual perspective at a time of general
confusion. As Paul says in 1 Corinthians chapter 13 verse 9:

“For we know in part and we prophesy in part, but when perfection comes, the
imperfect disappears.”

Until perfection comes, one has to make do with the imperfect. The writer will trust God
to do the rest. The scripture quoted from the book of Amos at the outset, gives one the
confidence to believe God will always impart wisdom to those who ask. Whatever the
result, it should prove an interesting and enlightening experience for many who’ve
never been exposed to the ‘prophetic’ before. In order to save time for those under
pressure, the writer sets out his conclusions below.

A. Global Markets
Following carefully coordinated fiscal and financial interventions on a massive global
scale, potentially exceeding THREE TRILLION dollars for the US alone, world markets
will defy the pessimists and recover. European and Asian Banks will rapidly follow
America’s example. A potentially calamitous collapse in property prices will largely be
averted as mortgage markets receive direct support, and are even subsidized. As
China cuts rates, eases bank lending, and launches a major infrastructure program,
commodity prices will recover. As the world’s FIAT money system prints and lends to
save its fractional reserve banking ‘monster’, inflation will resume but at an accelerated
pace. In comparison to the threat of deep depression, it will prove to be a relatively
minor problem. Naturally, long term bond rates will begin to rise in response. Be careful
of Bonds. By Christmas of this year, the price of GOLD could have risen to between
$1100 and $1200 an ounce. By April 2009, the price should be $1300. In the wake of
economic stimulus programs, commodity prices will spike back to pre-crash levels,
though not as fast or as sharply as gold. Get gold and commodity stocks while the
blood is flowing in the streets. Watch oil if the US attacks Iran by the end of January.
The price would then double from its recent $90 a barrel, down to around $180 by early
2009. Bear in mind, US stocks of crude are low, stocks levels of petrol, the thinnest
they have been since 1990!

Within a four year period the price of GOLD could be $3500, the price of OIL between
$250 and $300. The FIAT money system may well by then have been replaced by
return to a modified form of the GOLD Standard. The Automobile Industry will be on its
way to large-scale production of the ELECTRIC CAR. Over the medium term, US OIL
imports could eventually HALVE, significantly reducing the country’s trade deficit.

B. US/Israeli confrontation with Iran

The probability of this happening by end January would appear to exceed 50%. There
are prophetic confirmations that Iran is heading for a major humiliation before the next
US President takes office. The US has certainly given her every warning to cease her
 6

open threats against the tiny nation of Israel, and to open her nuclear installations to
UN inspection. The latter process was intended to preclude the possibility of Iran
building the bomb. She has secretly attempted this before, so no one believes her
protestations to the contrary. Islam condones lying to deceive the infidel in all matters
strategic.

C. Jacob Zuma will NOT become President

Mounting internal conflicts and increasing disarray within the ruling ANC, suggest the
growing likelihood of splinter groups developing within the Party, following the ousting
of President Mbeki. This will weaken the ANC’s position ahead of the April 2009
elections. Rising disaffection with the Party’s performance on a number of fronts could
further exacerbate popular support. Zuma himself might well fall victim to a move by the
Left Wing of the Party – being the Communists and COSATU (The Trade Unions) - to
call for a full investigation into the ARMS Deal. Their purpose would be to punish Mbeki
and those of his inner circle accused of hogging the spoils of corruption. The writer
believes that whether or not he goes to jail, Zuma will soon be put out to grass. If
Motlanthe withdraws, he could be superseded by someone of the likes of Tokyo
Sexwale. Tokyo is a billionaire businessman who recently delegated all corporate
responsibilities to competent executives such as Lazarus Zim, a senior ex-Anglo man,
and Mark Wilcox. Tokyo has effectively become a ‘politician-in-waiting’. By May
2009, as gold rises sharply and confidence is restored to the Presidency, the RAND will
be trading below R7/$. At the time of writing it last traded around R8.75!

1.0 THE BANKERS MEET

On Friday August 22nd 2008, Central Bankers gathered from around the world. They
came to participate in the Federal Reserve’s annual economic symposium at the
holiday resort of Jackson Hole, Wyoming. A lot had happened since the last time they
met and the name of the place aptly described the predicament they were in. It was a
nasty ‘Jackson Hole’. They were confronted by two very different choices, each of
which carried pitfalls.

i) The first was to allow a growing economic storm to build momentum, leaving
the final result to the workings of a long-established ‘free market’ system. In
this way they would continue to ensure that whatever lessons needed to be
learnt would in due course find their mark. None would escape the
consequences of foolish, greedy, or dishonest behaviour. The inevitable
outcome would be a painful, multi-year economic depression.

ii) The second, and far more difficult choice, would be to challenge widely
accepted principles of capitalism, through monetary and fiscal interventions
on a scale never before entertained by an American government. Led by US
authorities, central banks and ministers of finance would seek to inject
hundreds of billions of dollars or their equivalent in other currencies, into
hands of suffering banks, frightened taxpayers, and insolvent, panicking
homeowners. None of this had as yet been spelt out.

In the absence of intervention there was a growing minority who felt that unchecked
market forces would rapidly drive the countries whose affairs they managed off an
economic cliff. They maintained there was only so much a bank’s monetary policy could
achieve by cutting rates to stem recession – especially an economic crisis triggered by
massive bursting bubbles in housing and credit. Referring back to the lessons of the
 7

Great Depression they recalled that once a man burnt his fingers taking on excessive
debt, he wouldn’t easily be persuaded to repeat the exercise, even if rates were later
reduced. Banks who survive – if they survive – will become equally cautious. The
economist Keynes called it a desire for ‘Liquidity Preference’. In today’s conditions,
investors only want US T-Bills or a government guarantee. In September, they drove 3-
month US T-Bill rates to zero. The most risk-averse went for gold, boosting the price a
hundred dollars in a single day. They took the view that America’s banking system was
on verge of collapse and deposits were no longer safe.

Instead of allowing the current crisis to slide into depression, patterns of economic
behaviour have to change. Different forces will be required to drive a nation’s economy.
In the US it can no longer be credit-based consumption. In recent times 25% of
America’s Gross Domestic Product was financed on credit! Within 24 months the focus
must switch to infrastructure spend by government and states alike. Instead of building
houses, workers will need to be constructing, roads, bridges, and railways. When the
writer visits his daughter in Chicago he observes that the roads are in considerably
worse condition than those South Africa. There has been no major expenditure since
the late 1950’s and early 1960’s.

As Fed Chief Bernanke welcomed guests with an opening speech he had every
reason to feel a trifle embarrassed. A year earlier he had ventured that financial
damage from a then incipient ‘sub prime’ crisis would likely top out below $100 billion.
Twelve months later the figure was already over $500 billion and rising. Half the outflow
stemmed from rescue operations in the US alone, where analysts like Don Rich were
punting ultimate costs to approach $3 trillion! Little did investors appreciate that more
than half of America’s financial ‘toxic waste’ had been sold off to unsuspecting
European and Asian banks.

The downturn soon began to spread like a tsunami but each country claimed to have a
different plan for dealing with it. Many underestimated the severity of what was brewing.
Their schemes would in time prove grossly inadequate.

Hopes, that emerging markets would ‘decouple’ from a US slowdown, had been
dashed at the outset. China’s growth looked unstoppable but international investors,
who hopped from the Dow to a roaring Shanghai Index, suffered a vicious 65% haircut
in months. By staying put they would have escaped with a far less painful 16% ‘shave’.
At least the Chinese Yuan had strengthened against the American dollar. Those who
had the misfortune to trot across the Atlantic to the UK suffered a double whammy.
While the London FT index suffered a similar 16% fall to the Dow, a subsequent sharp
crack in the pound had doubled this loss to 32%. That was a month ago. Today the
damage is far worse, at least another 12% all round.

1.1 ONE MAN’S MEAT….ANOTHER MAN’S POISON

Quotation
“It was the best of times; it was the worst of times.”
Charles Dickens – ‘A Tale of Two Cities’

In an attempt to lighten the moment for his banking friends, Bernanke drew
encouragement from the recent slide in commodity prices. He hoped it would temper
rising costs for food and energy. It was the two items US statisticians conveniently
exclude from their measure of ‘core inflation’. But as every housewife knows: ‘it’s
 8

them what bites the hardest!’ A commodity crack was the scenario Bernanke had
relied on when rejecting earlier calls for higher interest rates to snuff ‘inflation’. Financial
‘hawks’ were adamant he should rather play it tough. Instead he focused on the risks to
growth by cutting rates from 5% to 2%. More effectively, he persuaded the Treasury to
distribute $150 billion worth of fiscal largesse by way of tax rebates over a four month
period.

The ECB, amongst others, was initially disparaging of what they termed an
‘unnecessary US panic’. However, as America’s growth briefly perked up to an annual
rate of 3.3%, Europe fell off its arrogant, know-all perch and slipped toward recession.
Most of its members are there already. The rest draw closer by the week.

Financial markets were quick to acknowledge the Fed’s wisdom. In less than eight
weeks, the EURO crashed from a July 2008 near-double top of $1.60, to an early
September twelve month low of $1.38. Most forget that eight years ago the EURO was
barely above $.80. It had doubled in less than a decade. No surprise then that on the
‘McDonald Hamburger Index’ of comparative buying power, the EURO should be
trading even lower, down at $1.25!

This is the moment to revert back to the heading of the section – one man’s meat being
another man’s poison - and the famous quote by Charles Dickens, from his ‘Tale of
Two Cities’: “It was the best of times; it was the worst of times.” What the wealthy
industrialized nations of the West today denounced as ‘commodity inflation’, the
underdeveloped countries of Africa and South America welcomed as ‘a long-awaited
change in their terms of trade’ - with erstwhile colonizers! An extract from an article in
the Financial Times published the weekend of the bankers’ meeting in Wyoming,
portrayed the perspective of the poor people of Paraguay:

“Take record commodity prices, add a subtropical climate that gives farmers five
harvests every 24 months and vast tracks of virgin arable land, and it is no
surprise that tiny Paraguay has emerged as one of the big beneficiaries of the
global food crisis.”

The above statement lends credence to the first half of Dickens’ quote:

“It was the best of times.”

For some it certainly was and, despite a stiff 20% correction in commodity prices, it still
is. Until a month ago many farmers were still enjoying the best of times. Others
disagreed. For countries like America- the world’s biggest grower of corn – but
dependant on costly imports of oil which at one point had trebled in two years from $50
a barrel to $147:

“It was the worst of times.”

Where does this leave global markets? Despite a vicious correction in oil, from $147 a
barrel down, at one point, to $88, the decline proved temporary, aided by the impact of
hurricane ‘Ike’. The latter eventually did more damage to offshore oil installations than
its infamous predecessor hurricane ‘Katrina’. Goldman Sachs reduced its December
forecast from $149 to $115. They should know. Three months ago there was a story to
the effect that they, JP Morgan, and Morgan Stanley, had jointly invested in 45m barrels
 9

of physical crude in a hole in the ground at Rotterdam. As markets slid lower, the rally
terminated, breaking towards $85. Despite the latest retreat, $115 by Christmas still
looks possible. If either the US or the Israel attacks Iran, it will prove conservative.

Long term growing demand will eventually drive the price through the roof if Matt
Simmons’ theories on ‘Peak Oil’ prove correct. He maintains production will never again
exceed 86m barrels a day. The rapidly industrializing nations of India and China will
then face the prospect of never being able to match the consumption patterns of a once
oil-rich West. The cause of their discomfort will be shrinking supplies from largely
ageing fields.

1.2 WORLD ECONOMY AT A ‘TIPPING POINT’

On June 30th, 2008, the Bank of International Settlements – otherwise known as the
‘Bankers’ Bank’ - issued its Annual Report. The BIS described the world economy as
having reached a ‘Tipping Point’. Without actually mentioning the word ‘depression’,
they implied the scales stood delicately balanced between the twin evils of inflation
and historic periods of economic stress. They referred as far back as the financial
crisis of 1873, but then made specific reference to the extended downturn which
followed the credit-fuelled boom of the late 1920’s.

In the three months which followed the publication of their prediction of impending
doom, the scales look increasingly to have ‘tipped’ away from inflation. As country after
country slides into recession, the bursting of a massive credit bubble threatens to
destroy the international financial system. The risk has become a global depression
accompanied by levels of unemployment which have not been seen since the nineteen
thirties. Recent bank panics have increased the likelihood of a global market crash.
Round the world, the scale of Central Bank and Treasury interventions needs to
escalate beyond imagination. In doing so it will threaten the very foundations of
capitalism, belief in free markets, and limited government – all long-held principles
proudly espoused by the United States when evangelizing previous adherents to
Communism.

The countries of Africa have long coped with levels of unemployment approaching 40%.
Rural, land-based populations, held together by an extended family system which
supports those in trouble, can still survive. However, were such a fate to befall the
industrialized nations of Europe or America, it would rapidly generate untenable chaos.
Why chaos, and how realistic is the threat?

One needs to go back to where it all began - the bursting of the US housing bubble.

1.3 COLLAPSE OF THE US SUBPRIME MARKET

It is helpful at this point to hark back to an earlier article by the writer, No. 80, published
a year ago on September 18, 2007. It was entitled:

“CREDIT IMPLODES – BANKERS PRINT – GOLD WINS”

On the front page was a picture of a ‘Crying House’. See below:

 10

The report dealt with the origins of the subprime crisis, describing how Bernanke’s
predecessor, Alan Greenspan, had attempted to counter the collapse of the internet
bubble. The method he chose –cutting rates to the bone, though right at the time – was
allowed to continue too long. By then it morphed into unrestricted lending to would-be
home-owners who lacked the means to pay. Part of the blame rests with the Clinton
Administration which twelve years earlier encouraged Fannie Mae and Freddie Mac to
make available 100% bonds to ‘previously disadvantaged families’, 60% of which
were American Negroes.

Greenspan’s overt approval of what took place more than a decade later, was
subsequently responsible for creating two even bigger bubbles, one in housing, the
other in credit. When both finally burst, the world entered what threatens to become the
most dangerous asset deflation in history. Here’s what the writer said a year ago. Skip
it if you remember:

Some financial commentators now acknowledge that in the wake of the ‘tech’ crash of
March 2000, Greenspan deliberately created a countervailing ‘asset bubble’ in the
housing market. His purpose was to boost domestic consumption to offset the
recessionary effects of an accelerating slump in equities. He faced a tough set of
circumstances. By the end of 2000 the NASDAQ had halved. A year later the Dow
followed suit, sliding 38%. Between January 2001 and June 2003, the Fed Chairman
responded by dramatically cutting interest rates from 6.5% to1%. This was the lowest
they’d been since 1959. The sudden appearance of artificially cheap mortgage rates
encouraged home ownership. House prices began to rise sharply. Within a short space
of time lenders were successively making bigger and bigger loans against the same
properties as they flipped from one owner to the next. As values soared first-time
buyers were being offered bonds which exceeded 100% of the price to give scope for
alterations.
As prices continued to rise, existing home owners discovered they could access
mortgages as if they were ATM’s – drawing cash whenever they felt the desire to
spend. Lenders encouraged them to take holidays overseas, buy motor cars, and make
alterations – whatever struck their fancy.
Greenspan drove his audience further over the cliff of recklessness with a speech he
made on 23rd February, 2004. He was addressing the Credit Union National
 11

Association in Washington and used the occasion to tell them of a Fed study into the
cost of servicing mortgages. He said investigation showed many homeowners could
have saved tens of thousands of dollars in the last decade if they had switched from
high-cost fixed-rate mortgages, into ‘ARMs’ (‘adjustable-rate mortgages’). Under ARMs,
which then made up only 28% of total mortgages, borrowers could expect lower initial
rates but ran the risk of higher payments down the line if rates in the broader economy
later rose. These were his words:
“American consumers might benefit if lenders provided greater mortgage
product alternatives to the traditional fixed-rate mortgage.”
Joseph McKenzie, Deputy Chief Economist at the Federal Housing Finance Board,
then elaborated on the choices now available:
“There are lots of innovative programs, especially targeting low-income and first-
time buyers.”
Amongst these ‘innovative programs’ was the so-called ‘teaser bond’. They offered
low introductory ‘teaser rates’ that reset substantially higher after a period of time –
usually two years. First-time buyers were often incapable of understanding the full
impact of the medium-term monthly costs of financing this type of mortgage. They had
even less chance of grasping the compounding effects of what would happen in the
event of a sharp rise in the general level of interest rates. First-time buyers were in for
some nasty shocks. From when Greenspan made his speech, the popularity of
adjustable-rate mortgages rose sharply. Up to 75% of first-time buyers eventually fell
for his ploy.
In retrospect Greenspan’s advice proved disastrous. He failed to tell avid listeners what
would happen if long term rates went up in response to economic recovery and rising
inflation. Four months after delivering his pearls of wisdom to an unsuspecting
audience, the Chairman of the Federal Reserve actually began the process of RAISING
rates himself. The first hike took place on June 30th, 2004. Between then and June
29th, 2006, he and his successor, Ben Bernanke, lifted rates 17 times, taking the Fed
Funds discount figure back up to 5.25% from its starting point of 1%. Bernanke only
took over in January 2006 so most of the damage took place under Greenspan.
Looking back, one can probably pin point the start of the housing crash to the month
the Fed announced its final rise – June 2006.

A more serious indictment of Greenspan relates to his famous 1996 description of the
Dow’s then new high of 6,000 as being a case of ‘irrational exuberance’. In a Fed
Open Market Committee meeting he conceded there was an ‘Equity Bubble’, admitted
that tightening margin requirements would stop it, but nevertheless declined to do
anything. An article by David Blake in the FT of 19/9/08, entitled ‘Greenspan’s sins
return to haunt us’, quotes the previous Fed Chairman’s comments at the time:

“I guarantee that if you want to get rid of the bubble, whatever it is, that will do
it.”

Blake explained that when Greenspan later defended the Fed’s inaction, he claimed in
three speeches made since that:
 12

“Tightening margins would not have worked.”

The Fed Chief had changed his tune. The writer believes Greenspan came under
pressure from Wall Street and Investment Banks to ‘leave well alone’ as all had their
snouts in the trough and were making millions in a roaring bull market in equities. Two
years later the Dow peaked at almost double Greenspan’s 1996 level of 6,000 which he
had originally condemned as ‘irrational exuberance’. It topped out at 11.800. Eight
years of inflation later it trades below 10,400. Assuming a low inflation rate of 3% a year
would put the cumulative real cost at around 25%, taking the effective value of the Dow
down to 8,850. Not a great investment.

Blake then described a second incident when, in 1998, the head of the Commodity
Futures Trading Commission expressed concern about the massive increase in over-
the-counter ‘derivatives’ – the very instruments at the heart of the latest crisis.
Blake says Greenspan suggested new regulations risked disrupting the capital markets.
When it came to the housing bubble, Blake says that before it burst, Greenspan
repeatedly maintained:

“Housing is a safe investment because prices do not fall.”

By August 2007, Dr Robert Shiller, Professor of Economics at Yale University had

already suggested that the current house price slide in the US could turn out worse
than the 30% average decline experienced in the Great Depression. Together with
economist Karl Case, Shiller developed the Case-Shiller home price index, America’s
most authoritative source for home price trends. A year later Shiller pointed out that
their index had already fallen 20% in two years from its June 2006 peak to end June
2008. It takes little imagination to pencil in a further nominal drop of 10% in each of the
following two years. That would take cumulative damage to 40%. Assuming three years
of so-called ‘core’ inflation at a mere 3.3% a year would lift the real cost of the implosion
to 50%! If left unchecked it could well happen.

1.4 CONTAGION SPREADS TO EUROPE AND THE REST

While few areas in the world can match the 40% twelve month collapse of property
prices in California, the shock of delayed contagion has been worse for those in
Europe. The scale of recent declines in the UK housing market is a case in point.
During the last decade the British enjoyed a trebling in the prices of their homes. They
have now experienced the biggest drop since 1990. In the past 12 months values fell
more than 12%, averaging 1% a month. The coming year could produce an equal or
greater decline as events play catch-up with trends in the US. Capital Economics
expects a 35% nominal drop by end 2010, converting to a real decline of 45%, after
taking account of inflation. The announcement of the initial first year crack prompted a
sharp warning from British Chancellor of the Exchequer, Alistair Darling:

“The Economic conditions facing Britain are arguably the worst they’ve been in
60 years and voters are ‘p……d off’ with Labour’s handling of the economy.”

His uncontrolled outburst caused sterling to post a new low under $1.77. It reminded
the writer of an Englishman’s canny forecast back in November 2007. The writer and
his wife were in Hongkong attending a Christian conference. While enjoying a cup of
 13

coffee in a restaurant they got into conversation with a British asset manager. When
asked his strategy for the year ahead he smirked and replied:

“ABS!”
When invited to explain, he spat out:

“Anything But Sterling!”

When challenged to justify such blunt advice he predicted the pound would fall to $1.70
within a year. At the time it was trading at a multi year high of $2.11. He gave his
reasons. They were cogent. With London being the financial hub of Europe, and many
claim the world, a spreading sub prime meltdown would cause enormous layoffs in the
capital city’s financial community. When combined with an expected nationwide
meltdown in housing – and British property prices are particularly susceptible - it would
inflict greater overall damage on the UK economy than most anywhere else. It was hard
to fault his logic and in retrospect he’s been remarkably accurate. The pound is close to
the level he predicted. As of now it’s $1.76.

Britain and the US are not alone. Many thought both Europe and Emerging nations
would ‘decouple’. Instead Europe is currently slowing faster than the US. Hence the
EURO’s precipitous fall from $1.60 in July to $1.37 by early September, as the US
enjoyed a relative fillip in the wake of its one-off fiscal stimulus of $150billion to
taxpayers. Today the whole of Europe is grinding to a halt. By the end of September
Germany had experienced two full quarters of contraction. In eight months the Irish
economy has swung from dream to disaster. With a dramatic downturn in housing and
construction, tax receipts have shriveled. This caused Ireland’s budget deficit to treble
and its market to implode. The country drastically needs a fiscal stimulus and a
package of tax cuts, but this would cause them to run foul of European Union
commitments on fiscal discipline. What are they to do? Full obedience to EU rules and
regulations appears increasingly unattractive, hence their reluctance to comply. A week
ago their market slumped 8% in a single day. Since then, the Irish government has
issued a blanket guarantee to depositors of all Irish banks. Britain’s furious as their
banks watch customers flee across the Irish channel in search of maximum safety.

Meanwhile the European Central Bank blathers on about the dangers of inflation. The
longer they delay taking action, the harder they ultimately get hit by recession. This in
turn will cause the dollar to strengthen again, especially with the latest short term rally
in the EURO having played itself out. Can the US economy continue to display greater
resilience? It will only happen as a result of a more interventionist economic strategy.
Congress initially said no to the Treasury’s $700billion bailout strategy. The Dow then
fell 775 points in a single day. The Senate gave in first, after the pill was sweetened
with tax concessions worth $100billion. Second time round, shocked by the panic and
anger which followed their initial rejection, Congress changed its tune.
Unlike the US Federal Reserve, which is expected to steer a careful path between the
twin posts of promoting growth and controlling inflation, the ECB’s sole mandate has to
date been the avoidance of an inflation rate higher than 2%, irrespective of short term
pain. Until the flashing light of inflation has been totally turned off, they vowed to pay
little or no attention to the risks of recession. By then it could be too late. In Spain,
where unemployment slid to 8% in 2007, the government now expects a rise to 11% by
December 2008, and 12.5% by end 2009.
 14

Outside the US and Europe, a tsunami of recession is spreading there too. A fortnight
ago, for the first time in 7 years, the Aussies cut bank rate 25 points to 7%, as growth
slowed to a virtual halt. Their Kiwi neighbours are already in recession and cut for the
second time.

China remains one of the few fortunate exceptions. Last year’s frenetic 12% growth
rate has moderated to a relatively enviable 10% in response to tighter government
restrictions on lending by banks. In the process the country’s inflation rate has almost
halved from 8.9% in February to 4.9% by August. Satisfied with these results, the
authorities are ready to launch new policies to reignite growth. Apart from planning to lift
curbs on lending, they plan a significant boost to public expenditure. In July China’s
trade surplus notched up a new record, $28 billion for a single month. Even were
exports to slip, the country has plenty of capacity to boost local consumption and raise
imports. It’s in the interests of the US that they do. Last week China cut rates for the
first time in six years. Simultaneously their central bank reduced required commercial
bank liquidity ratios. The country’s substantial balance of payments surplus places it in
a powerful position to boost domestic consumption should exports decline. Budget
surpluses are equally vibrant. In the first half of 2008 they rose 33%. The trick would be
to persuade the average Chinese family to save less. They will only do so if
government improves social security, enabling workers to feel more confident about
pensions, health and education. Any country in Europe would be only too happy to
show them how it’s done!

Why is China so important? If they and the other so-called ‘BRIC countries’ – Brazil,
Russia, India and China – maintain their growth rates, then commodity prices will soon
recover from what will then prove to have been a stiff but ‘temporary correction’.

1.5 HOW BAD CAN IT GET IN THE US?

Before addressing the action required to avert a serious recession, one needs to reflect
on what could happen if things are allowed to slide.

A year ago the US property market was worth around $20trillion. Mortgage debts
currently total $11.4 trillion, half owned by Fannie Mae and Freddie Mac with a claimed
net market value of $5.6 trillion. More important, the two entities are responsible for
funding upwards of 70% of all new mortgages – some say as much as 90%. A 30%
crack in the housing market would wipe more than $3.3 trillion off the equity values of
those with mortgages. If half the loss was attributable to owners with 70% to 100%
bonds, lenders could lose up to $1 trillion through potential foreclosures. The greater
part of this damage would afflict the Fed’s recently acquired agents, Fannie and
Freddie. Were that to happen, budgeted bail out costs of $100 billion each would prove
laughably inadequate. Multiply both by five.

How can one make such a prediction? US legislation allows borrowers whose house
values have slipped under water in relation to an outstanding mortgage, to hand their
keys to the bank and walk away. Lenders have no recourse to an owner’s remaining
assets. It’s called joining the ‘jingle chain’. The ease with which this can be done
encourages property foreclosures and contributes to forced-selling. Estate agents
claim that upwards of 70% of foreclosures come from ‘walkers’ most of whom don’t
bother to inform the bank prior to them abandoning ship. It’s been estimated that in
 15

excess of a third of those who bought properties in the last five years now owe MORE
on their mortgages than the houses are worth. For those who bought at the June 2006
peak, the figure rises to 45%.

In addition to the above, American households owe a further $2.5 trillion in credit card
debt. In a serious deflation at least a quarter of this amount could conceivably go up in
smoke. It would hike the total loss from an initial estimate of $1 trillion to at least $1.5
trillion.

That’s before one gets to look at corporations. Some estimate the losses here could
exceed those in the housing market, particularly if the crisis in the financial sector
begins to impact the real economy. In a recent issue of the FT Anousha Sakoui from
REUTERS reported:

“The amount banks have lent to companies has HALVED as a result of the global
financial crisis, and evidence is growing that credit facilities are being provided
on a SHORTER-TERM basis.”

Whereas five-year maturities in the US from 2005-2007 made up 56% of loans, the
figure has crashed to below 20%. Syndicated lending in Europe, the Middle East and
Africa has fallen 49% over the last year, and 70% in the last quarter compared to the
same period nine months ago. Banks need help!

It is reported that in the event of a serious recession, losses here could escalate rapidly
and become substantial. Tack on another $trillion for the US alone. If added to the
$1.5trillion for housing and credit cards, it would gobble up $2.5trillion for the non-
financial sector alone.

As an example of corporate fragility, take the US motor industry. In the absence of a

further slowdown, they are seeking a $50 billion bailout to stay solvent and restructure.
They have already been offered $25billion. If they are to stand any chance of
developing fuel saving vehicles such as the electric car, government will have to come
to the party with the balance. An amount of $25billion will only cover anticipated losses
for the next 24 months. In a major recession it could double again. That’s just the motor
industry.

For Japan, declining vehicle sales to the US have already caused cut exports by 22%.
This is the first seasonally adjusted trade deficit Japan has experienced since 1980! No
wonder the Yen is stable versus the dollar!

Then there are American states and counties verging on bankruptcy. Municipal
borrowing costs have soared. Even New York City faces paying 9% for long term
money. They have decided to wait. California is asking for federal help to the tune of
$7billion.

Finally there is the financial sector. US Treasury Secretary Hank Paulson’s ’s much
vaunted $700billion fund to buy up ‘toxic debt’ – another word for ‘distressed assets’ –
would only suffice as a first step in saving the banking system from a near meltdown.
Paulson has suggested a ‘reverse auction’ whereby lowest offers get bailed out first.
They would naturally take the greatest hits. Book values would collapse from notional
values of 90-100US cents on the dollar to 20US cents and less. Bank balance sheets
 16

would be seriously impaired. Those in the know reckon the damage would total at least
$500billion. Fed Chief Bernanke has suggested offering the banks ‘theoretical-value-
to-maturity’ for their dodgy assets, instead of ‘fire sale’ prices. Voters are not amused.
Republican Senator Jim DeMint from South Carolina reported to the Joint
Congressional meeting:

“I’ve never seen people so angry. Our calls are a hundred to one against this
bailout. They don’t trust the government.”

The problem is that the tougher the prices offered, the bigger the hole it will leave in
bank balance sheets. Given the current fragile climate, only the strongest would then
succeed in attracting fresh capital. Note how quickly the ‘Robber Barons’ of the ‘Gold
Cartel’ -Goldman Sachs and JP Morgan – were able to benefit at the expense of their
weaker, less connected brethren. Goldman was able to suck in $5billion of fresh capital
from Warren Buffett! Lehman on the other hand went down. Not to be outdone, JP
Morgan grabbed Washington Mutual, the country’s largest ‘savings and loan’ company,
for a mere $1.9billion. Shareholders and bondholders lost everything. The rest will hang
out to dry unless the Treasury or JP Morgan comes to the party. In the case of Bear
Sterns the Treasury chipped in $29billion. The public won’t stand for any more open
gifts. In future they will insist they either do it by way of Preference shares, or equity. In
the case of AIG, Treasury was forced to acquire 79% of the company’s equity. Down
the line, in years to come, government can dispose of these and other stakes,
eventually making a profit. For the present they would have to come up with hard cash
– at least $500billion to replenish gap left by current paper losses.

It is not impossible to envisage an overall combined loss for the US alone at $3 trillion.
In support of that amount, Professor Nouriel Roubini of New York University estimated
a $1trillion hit for the mortgage market alone:

“The losses for the financial system from people WALKING AWAY could be of
the order of ONE TRILLION dollars when the entire capital of the US banking
system is only $1.3 trillion. You could have most of the US banking system wiped
out, so this is a total disaster.”

US policy makers need to make ‘walking away’ less attractive, but in the absence of
incentives and a rewrite of existing contracts, it will never work and is only part of the
problem.

Five months ago the Treasury implemented a ‘one-off’ fiscal stimulus by handing out
$150billion worth of tax checks. Economic growth briefly recovered to an annual rate of
3.3%. A week ago, as the effects of the stimulus wore off, US retail sales resumed their
slide. This in turn caused the dollar to weaken and gold to bounce. What’s the answer?
Does the world face depression or is there a way out? Doomsayers are predicting a
massive sell-off in the Dow. A recent crack lopped 1000 points off in three days, taking
the index down to 10,400. Other markets fell in sympathy. They recovered when the
Fed announced its latest $700billion rescue package. When Congress voted against
the Paulson package, the subsequent one-day sell-off was vicious. From initially being
against the package, the public is gradually getting the message. ‘We are living in
dangerous times.’ What’s the solution?

1.6 THE LIMITS OF MONETARY POLICY

 17

The strident response of the British Chancellor of the Exchequer to the collapse in the
UK property market and the onset of recession was in part an expression of frustration
with the relentless inflation-fighting tactics of the Bank of England. Although not as
fervent as his European counterparts at the ECB, Mervyn King’s failure to cut rates has
been driving British politicians in the ruling Labour party crazy – Darling in particular. In
the end they are the ones who carry the can for an economy’s dismal performance.

Darling should have learnt from the experience of his friends across the Atlantic.
Despite the Fed cutting its discount rate from 5.25% down to 2% - ultra low compared
to the UK’s present 5% - it’s had no visible impact on either demand for credit or its
cost. Lenders are increasingly in trouble, verging on bankruptcy through the collapse in
housing and its effect on mortgage values. Banks are unwilling to lend further funds at
lower rates, even if balance sheets allowed it and the cash was available. In fact prior to
the US Authorities’ latest round of interventions, financial markets froze completely.
Despite the Fed’s lowering of interest rates, mortgage costs have actually increased.
No one wants to lend. Even if they did, few wish to borrow except those who can’t
repay.

Despite rescuing Bear Sterns, Fannie Mae, Freddie Mac, and more recently America’s
biggest insurer AIG, the Fed’s odd decision to dump Lehman Brothers set off a panic.
In retrospect it was foolish. Who would in future qualify for a government bailout? More
and more institutions were in trouble, house prices continued to slide. Suddenly the
entire DERIVATIVE market began to implode. Those involved attracted massive short-
selling. Share prices halved overnight. The uninitiated responded by banning all forms
of short-selling, from naked, without scrip, to ‘legitimate’ – even when scrip is borrowed.

At latest count there were 117 financial institutions on the Government’s danger list but
a derivative meltdown would have had much wider and more serious ramifications.
Some analysts placed the total value of outstanding derivative contracts at $62 trillion!
The financial world had become nothing more than a sophisticated gambling den – and
not that smart if most were now in trouble! Despite these growing risks financial hawks
still urged both Government and Fed to walk away from Lehman Brothers and anyone
else who threatens to fall. In principle it would normally be seen as good discipline to
allow fools to suffer. The practice aligns perfectly with text book free market
economic theory. Those who make mistakes ought to bear the consequences. In this
case however the outcome could potentially be far more serious than most envisage. If
one major bank is allowed to collapse, it would trigger a run against all. (With the near
collapse of Fortis in Europe, it has in fact just happened!)

In what is called the ‘fractional reserve banking system’ no bank keeps more than
5% in cash. Without outside help – from either the Fed or Treasury - not one of them
could withstand a ‘run’ in today’s environment. The Fed and Treasury acting in concert
have no option but to ‘pump and bail’. Hence the Treasury’s recent decision to
guarantee ALL money market funds as they were swamped by massive cash
withdrawals when it became apparent one of them had lent a huge amount to Lehman
and would battle to survive.

What makes matters worse is that in a credit-based money system, the credit given and
taken represents the actual MONEY SUPPLY. As credit begins to shrink, so does the
outstanding supply of money. What follows is lower demand, falling prices, DEFLATION
 18

and ultimately recession or depression. Therefore, in some way or another, the money
supply has at least to be kept constant, preferably increased at a modest rate. How can
this happen if the economic climate begins to deteriorate, or worse, becomes fragile as
is true today? Markets are filled with fear and panic.

1.7 IS IT TIME TO ABOLISH THE FED?

In any rescue operation, and in the absence of a gold standard, money has to be
printed. Before the writer puts forward his rescue strategy, it is as well to see who will
be responsible for carrying it out, and why. In the US the function of physically printing
money or creating it digitally, is the role of the Federal Reserve. What is the Fed and
who owns it?

The Federal Reserve is privately owned – as is South Africa’s own Reserve Bank!
The Fed also has its limits. Its $800 billion balance sheet has already been encumbered
to the tune of $550 billion. Having to rescue one more major bank would stretch the Fed
to breaking point. It could never cope with anything approaching a $3trillion bailout!
That might prove a blessing in disguise and could provide the best solution of all! It
would create an opportunity for Congress to nationalize the Fed and relegate it to
being a branch of Treasury. Through an Act of Congress the Treasury would buy out all
private shareholders at par or less. It would place the American people back in control
of their financial destiny – for the first time since 1913.

That was the year the Fed was ‘set up’ and a ‘set up’ it was indeed.

A private group of wealthy men, led by Senator Nelson Aldrich, maternal grandfather to
David Rockefeller, bribed would-be American President, Woodrow Wilson, to approve a
plan to place control of America’s money supply in the hands of private lenders. J.
Pierpont Morgan and Andrew Carnegie were amongst them. Morgan dominated
finance, Carnegie steel, Rockefeller monopolized oil. In return for Woodrow Wilson’s
compliance they agreed to support his bid for President. Needless to say Wilson won
and in December 1913, when most members of Congress were on vacation prior to
Christmas, the Federal Reserve Act was passed. It remains in total conflict with the
American Constitution as set out below. Those who gave their assent had certainly not
read the small print. It gave the Fed the right to print, and print big!

Yet Article 1, Section 8, of the American Constitution, states that:

“Congress shall have the power to CREATE money and regulate the value
thereof.”

Despite the above provision, the new Act gave the Federal Reserve the right to usurp
the American people’s constitutionally entrenched right to print their own money.
Instead, as Ellen Brown says in her magnificent book, ‘WEB of DEBT’:

“While the national money supply would be PRINTED by the US Bureau of

Engraving and Printing, it would be issued as an OBLIGATION or DEBT of the
government, owed back to the private Federal Reserve with INTEREST.”
 19

Having ordered the funds to be printed at virtually zero cost to itself, the Fed would then
use the funds so created out of thin air to purchase Government Bonds. The state
would then owe the funds back to the privately owned Fed with INTEREST.

Since then America’s entire money system has become CREDIT-BASED. Through the
charging of interest, the money supply of the US has perforce to INCREASE ad
infinitum. Even in the absence of real growth in the economy, the money supply would
normally continue to grow simply to cover recurring interest.

The Federal Reserve Act was passed on December 22nd, 1913. President Woodrow
Wilson signed it into law the next day. He later regretted his actions and before he died
is reported to have said:

“I have unwittingly ruined my country.”

The Fed’s subsequent management of the economy in the two decades that followed
was less than exemplary. They encouraged the stock market bubble of the ‘roaring
twenties’. They then mismanaged the collapse. They tightened monetary policy when
commodity prices had already begun to decline. At that stage there was not the
slightest hint of inflation. Instead the Fed became totally pre-occupied with attempting to
quell speculation on Wall Street and stem outflows of gold to France. By July 1928 the
discount rate in New York had been raised to its highest level since 1921. During the
two months which followed the cyclical peak of August 1929 to the crash of October,
production, wholesale prices and income, fell at annual rates of 20%, 7.5% and 5%,
respectively.

The Fed later eased but too late. Finally, in October 1931, as gold outflows resumed,
the Reserve Bank of New York raised its discount rate TWICE in a month. It was the
sharpest rise in so brief a period through the Fed’s then history to date. It triggered a
‘spectacular’ increase in bank failures and runs, with 522 commercial banks closing
their doors in October 1931 alone.

By the end of the decade of ‘depression’ half of all US commercial banks had either
closed or merged. Historians of the period point out that under the institutional
arrangements that existed between banks PRIOR to the establishment of the Fed, bank
failures of this nature would never have occurred. The large banks that regularly
intervened before the founding of the Fed, now felt that protecting smaller brethren was
no longer their responsibility. The extinction of bank deposits led to an abnormally large
DECLINE in the stock of money. This in turn caused greater DEFLATION and declines
in output than would otherwise have occurred. Following the death of Benjamin Strong,
Governor of the Federal Reserve Bank of New York, the Fed’s biggest ‘member’, the
country’s Central bank became leaderless and lacking in expertise.

Fortunately, current Fed Chief Ben Bernanke is an expert on that particular period of
economic history. When called on in November 2002, to speak on the occasion of
Milton Friedman’s ninetieth birthday, he gave credit to the man who had taught him
much of what he’s learnt about Fed mistakes during the first two decades of its rule. He
closed with the following admission and promise:

“Let me end my talk by abusing slightly my status as an official representative of

the Federal Reserve. I would like to say to Milton and Anna: Regarding the Great
 20

Depression. You’re right, we did it. We’re very sorry. But thanks to you, we won’t
do it again.”

Bernanke only took over as Fed Chief in June 2006, four years after his speech.
Thanks to mistakes made by his predecessor Greenspan, Bernanke faces an economic
crisis potentially far greater than his early predecessors of the 1930’s. He will need
every lesson of history he has garnered through years of study. By the grace of God
he’s an expert in the problem his country now faces. That won’t necessarily protect
either him or his counterpart at the Treasury, Hank Paulson, from making mistakes.
What he will certainly implement is a revised form of the deflation strategy described in
his lecture of 2002. His most famous quote is set out below but it cost him dearly:

“Like gold, U.S. dollars have value only to the extent that they are strictly limited
in supply. But the U.S. government has a technology, called a printing press (or,
today, its electronic equivalent), that allows it to produce as many U.S. dollars as
it wishes at essentially no cost. By increasing the number of U.S. dollars in
circulation …under a paper-money system, a determined government can always
generate higher spending and hence positive inflation.”

The above statement gained Bernanke the nickname of ‘Helicopter Ben’. However,
until the international money system returns to being founded on an old-fashioned
Standard of Golf, wild swings in money supply will always be possible under a debt-
based financial system. As the credit bubble implodes and inter-bank lending freezes,
money supplies shrink fast and furiously.

In the same breath that economists predict deflation, they viciously attack proposed
FISCAL and FINANCIAL interventions by Treasury and Fed alike. For any free-market
economist committed to minimal government and capitalism, most of the suggestions
for dealing with the growing crisis in the US and elsewhere, reek of socialism at its
worst. Unfortunately, the capitalist dream has spiraled out of control and lost its right to
continue unhindered. Too many innocent victims will be crushed in its wake if
government stands back. In the same breath, socialists, communists and left-wing
interventionists are sickened at having to bail out bankers and wealthy
businessmen. What can and ought to be done?

1.8 AN EMERGING RESCUE STRATEGY

As the writer was preparing to tackle this, the most challenging section of his article, he
came across a newspaper commentary which seemed particularly relevant. It had
nothing to do with finance but everything to do with effectively handling a problem.

“If there’s a RUNNING TAP in a room, do you mop up, or CLOSE the tap?”

Treasury Secretary Henry Paulson – ex CEO of Goldman Sachs – has urged Congress
to ante up $700 billion to buy toxic debt from beleaguered banks. Hedge funds have
been excluded. As urgent and as necessary as his plan may be, Paulson is only
addressing an ‘effect’, albeit the most serious in the very short term. The Democrats
will most certainly approve it, but are expected to insist on changes. The first would be
a plan to grant assistance to homeowners facing foreclosure. They reason from a
human perspective. Why should homeowners be left to suffer when wealthy bankers
 21

are bailed and rescued – some to walk away with multi-million dollar retirement
packages?

The writer is convinced there is an even stronger argument for assisting homeowners
and it has nothing to do with morals. The MORTGAGE INDUSTRY was, and remains,
the original RUNNING TAP. It triggered the sub prime meltdown and gets worse with
every passing month. Turn it off first. It needs to be addressed and fixed
simultaneously – and not just for political purposes. Doing it will certainly help make a
bank bailout more palatable, but there’s a far more important reason.

If matters are allowed to slide, $3trillion worth of overall damage looks to be a fair and
reasonable estimate. Then rather spend the SAME amount upfront, split three ways, to
bail out each sector in turn. Given time, half the cost could ultimately prove to have
been of a TEMPORARY nature and will likely be recouped over the next five to seven
years. Spending it today would save the system and spare millions of people
unnecessary pain and suffering. Here are FOUR possible steps which the writer
believes are collectively necessary to affect an overall economic rescue:

STEP 1. A $1TRILLION, TWO PART, BAILOUT FOR BANKS

Part 1 would involve the purchase of assets. Let all know that the Treasury will only pay
‘fire sale’ prices. This will reduce the upfront cost from $700billion to $500billion.

Part 2 would require a compensatory injection of fresh capital to cover realized losses.
This could be done either by way of equity or convertible preference shares, which
might prove less risky. The government would acquire a number of major stakes in
quoted financial groups. Warren Buffett has already shown the way with Goldman
Sachs.

If management was either retained or strengthened, as the economy recovered, share

prices would follow. Over time government could dispose of the assets it will acquire
through auction and the equity it will pick up via rights issues. The act of rescuing the
overall economy would rapidly restore confidence to the mortgage and housing sectors.
In due course, there would be others like Warren Buffet prepared to throw in private
funds as well, reducing the burden on government.

STEP 2. RESCUE MORTGAGES BY BAILING OUT HOMEOWNERS

Having acquired control of Fannie Mae and Freddie Mac, the two largest issuers of
mortgage loans, the Treasury can immediately reinstate ‘TEASER BONDS’. Cut the
mortgage rate for all homeowners in trouble. Reduce it by HALF for a fixed five year
period. Where necessary reduce the initial size of the mortgage if nothing else works
and the current book loss already exceeds 25%. In exchange, homeowners would be
required to sign an amended mortgage agreement. This would forbid them from
walking away at the end of the period or earlier, unless government lending agencies
had prior claim on all remaining assets in the event of a loss. This would go a long way
to prevent abuse by those who previously could have settled but chose to walk instead.
It would give all concerned both an incentive and an enhanced ability to stay in their
homes.

At the end of five years, homeowners would have saved approximately 3% a year in
interest, being 15% in total. Five years of renewed inflation, at around 5% a year, would
have added a 25% to the money value of most properties by the end of the period.
Together with the 15% saved on interest, homeowners would have enjoyed a 40%
 22

cushion. All concerned would have a far better prospect of surviving intact. Cost to the
Treasury by way of interest subsidies, would amount to 15% of Fannie and Freddie’s
total mortgage book of $5.6 trillion. This works out to $840 billion. Add a further
maximum injection of $160billion to cover a limited number of mortgage write downs,
where values had fallen more than 25%. The trillion dollar total would equal the
amount reserved to rescue the banking sector. However, it might well reduce the scale
of banking sector damage by addressing the underlying problem.

There would be one significant difference. The value of ‘fire sale’ assets purchased by
Treasury would rapidly appreciate, as would the equity value of capital infusions. Why?
Because, the rate of housing foreclosures would drop dramatically, restoring confidence
to both the sub-prime market and related derivatives. Blatant fraud would be another
matter.

STEP 3. BOOST THE ECONOMY VIA FISCAL INJECTIONS TO TAXPAYERS

Some five months ago the Treasury posted millions of $600 checks to taxpayers,
costing $150billion in total. It effectively boosted the economy back to a 3.3% positive
annualized rate of growth over a four month period. The program needs to be repeated
SIX more times over the next two years. It would cost a further $900 billion. An
additional $50billion needs to be given to the motor industry, by way of low cost
medium-term convertible preference shares. This would enable GM, Ford, and Chrysler
to survive and thrive at a time of great opportunity. The imminent arrival of the world-
wide launch of the ‘ELECTRIC CAR’ would ensure that American motor manufacturers
stay on TOP as the industry enters a dramatic new phase of its history. Over time it
would enable the US to cut its imports of crude by half. It would also make it possible
for US manufacturers to regain some of the ground they’ve lost to international
competition. The writer will explain how this is possible in his next article which will
focus on prospects for the ELECTRIC CAR.

Financial assistance to the motor industry at the present time would over the medium
term help the US trim its overall trade deficit. It would specifically help the country to cut
its dependence on imported oil at a time when medium term prices are otherwise set to
escalate. It would also reduce America’s dependence on unfriendly sources of oil.
Europe would be well-advised to follow suit. It would help them limit their need to cow-
tow to an increasingly power-hungry Russia.

STEP 4. PLAN A MAJOR INFRASTRUCTURE PROGRAM

Twenty five percent of America’s Gross Domestic Product is credit based. The growing
liquidity crisis will cause much of that to fall away. Habits will change. People will
become more frugal. They will learn to avoid debt like the plague. In order to maintain
the country’s Gross Domestic Product, falling consumption has to be replaced by
growing investment. America’s infrastructure is in dire need of renewal. Over the next
two years, as the economy recovers under the stimulation of tax checks, both Federal
Government and States need to draw up plans to fix roads, bridges, railways, harbours,
and airports. Later on, as the launching of the ELECTRIC car becomes a reality, the
country will need to renew much of its electrical wiring as well. Multiple distribution
points will have to be established at filling stations and private houses. The government
ought to budget to spend at least another $2 trillion a year from 2011 onwards. This will
fill the gap as debt-based consumption fades.

The cost of the above four interventions would initially approximate the likely ultimate
cost of doing NOTHING - except the outcome would be substantially different and
 23

considerably more preferable. To the extent that it COMPENSATES for the destruction
of credit-based money which would otherwise take place, it would not be inflationary.

Clearly the PERCEPTION of inflation would increase. However, if the interventions are
carefully managed, far from causing a collapse of the dollar standard, it would serve as
an example which Europe and Asia would do well to follow. As US growth recovers,
offshore investment would continue to flow in, thereby continuing to cover the trade
deficit.

There is no doubt that the FIAT money system as a whole will gradually be
undermined by increasing inflation but it need not be of the hyperinflationary variety if
judiciously controlled. Over time those in authority will come to realize that crises of this
nature can in future be avoided only if debts are strenuously controlled and paper
money rooted once again on a foundation of gold. Certainly the gold price itself would
increase dramatically. If it rapidly DOUBLED it would do no more than CATCH UP with
where it ought to have been had the likes of Goldman Sachs and JP Morgan not so
rigorously set out to control and suppress it at the behest of the Fed. As more and more
people are made aware that the Fed is privately owned and that the above two entities
are major shareholders, their actions will be watched far more closely.

Here is an example of their latest gambit to hammer precious metals:

On July 8, 2008 those who belong to the GATA camp – Gold Anti Trust Action
Committee - were made aware of the US Authorities latest clandestine efforts to
suppress the prices of gold and silver. It helps give a false measure of support to
the central banks FIAT money system. Ted Butler and others discovered that
three unknown banks – probably Goldman Sachs, JP Morgan, and another - had
collectively sold ‘short’ 8 million ounces of gold, between $920 and $970 an
ounce. The same three banks had simultaneously sold short 139 million ounces
of silver at around $19 an ounce.

A month later, by August 8 - and $150 lower - the gold had been repurchased.
The silver is taking somewhat longer. However in the process, the price of silver
was smashed down from $19 to an intra-day low of around $10.50! This occurred
at a time when markets were collapsing and precious metals would normally
have attracted investment attention as havens of safety in a storm.

In fact the proof of the pudding in relation to the veracity of the above allegations
lies in what happened to the PHYSICAL markets for both metals. As the futures
markets were both being CRUSHED, there arose an inexplicable SHORTAGE of
coins and bars. Government MINTS ran out of stock and were forced to suspend
sales. Premiums were – and still are - being paid for physical supplies at a time of
great financial uncertainty. Yet the futures markets told a completely different
and CONTRADICTORY story.

It is common cause among members of GATA that Goldman Sachs and JP Morgan
have been leading the suppression charge for a decade. It is therefore with some
amusement that one observes the speed with which both banks vigorously objected to
concerted SHORTING of their respective stocks during the latest meltdown in the
financial sector.

A worldly observation might be:

 24

“What goes around comes around.”

A more appropriate biblical comment would be:

“What you sow is what you reap.”

Isn’t God a God of justice!

1.9 PRINTING VERSUS BORROWING

The Treasury’s latest bailout plan cannot possibly be financed by the Fed. They simply
don’t have the balance sheet to support the amount required. Is this not now the perfect
occasion for members of Congress to stop playing games? Declare timeout for the Fed,
but in the nicest possible way. Pay them off and close the page. Why play games with
issuing bonds to the Fed when their payment is simply printed out of thin air? Danger to
the Government Bond market would be far less than that posed by the increasing
prospect of excessive debt resulting from a bailout. It would not require finding lenders.
Nor would it add one cent to the national debt. Printing to counteract DEFLATION
would not even be inflationary.

The current economic crisis presents a heaven sent opportunity to question the merits
of allowing the Fed to remain in private hands. In terms of the US Constitution, the right
to create and print money belongs to the people. It should never have been placed in
the hands of private individuals. There is no way the Fed’s existing balance sheet can
magically expand from a current level of $800billion worth of largely toxic debt
instruments, to the additional $3trillion now required to bail out nation. While most
readers might think the writer has lost his marbles, consider the following extract from
Ellen Brown’s excellent book referred to earlier and known as: ‘WEB of DEBT’

“The idea that the federal debt could be liquidated by simply printing up money
and buying back the government’s bonds with it is dismissed out of hand by
economists and politicians on the ground that it would produce Weimar-style
runaway inflation. But would it? Inflation results when the money supply
increases faster than goods and services, and replacing government securities
with CASH would not change the SIZE of the money supply. Federal securities
are ALREADY money. They have been money ever since Alexander Hamilton
made them the basis of national money supply in the late eighteenth century.
Converting federal securities into U.S. NOTES would not cause prices to shoot
up because consumers would have no more money to spend than they had
before……If the government were to BUY BACK its own bonds with cash, these
instruments representing financial value would merely be converted from
interest-bearing notes into non-interest-bearing LEGAL TENDER. The funds
would move from M2 and M3 into M1 (cask and checks), but the TOTAL money
supply would remain the SAME!.....That is very different from what happens
today. When the FED uses newly-issued Federal Reserve Notes to buy back
government bonds, it does not void out the bonds. Rather they become the
‘reserves’ for issuing many times their value in new loans. The new cash created
to buy them is added to the money supply as well. That highly inflationary result
could be AVOIDED by simply authorizing the government to buy back its own
bonds and taking them OUT of circulation….If the Federal Reserve were a truly
 25

‘FEDERAL’ agency… there would be no need to back its dollars with government
bonds.”

How about that then? Isn’t Ellen Brown brilliant? All those Democrats, panicking about
the rising cost to taxpayers of an imminent ‘FED’ bailout, could relax if the above was
implemented. As for a new ‘FED’ being less INDEPENDENT, how can ‘PRIVATE’
bankers be independent anyway? They must inevitably have a ‘PRIVATE’ agenda of
their own. Now is the time for Democrats to act in the interests of taxpayers. However, if
it’s true that Obama is already being funded by Goldman Sachs, he will of course
refuse. If both Presidential candidates are members of the Council on Foreign
Relations, the bankers have them in their clutches already. Maybe Palin can do it?

2.0 A PROPHETIC CONCLUSION

The above is a pictorial demonstration of a young man listening to Jesus. In the New
Testament Book of 1 Corinthians, chapter 14, verse 1, it says as follows:

“Follow the way of love and eagerly desire spiritual gifts, especially the gift of
PROPHECY.”

Again in 1 Corinthians, but this time chapter 12, verses 8 to 10, the nature of the NINE
spiritual gifts available to every Christian believer is clearly defined. Over the years the
writer, in his walk with the Lord, has always encouraged Christian friends to develope
their spiritual gifts. In the Men’s Breakfast Group that he runs with a team of leaders,
known as ROTOP or Round Tables of Prayer, he frequently invites men and women
with a notable prophetic gift to come and minister. In the process all present gradually
learn to discern which words are of God and which are not. No one of course is
infallible.
 26

Over the years the writer has met a number of people whose ministries have been quite
outstanding. Their ability to hear God’s voice has been unusually accurate.

For present purposes the writer will restrict the topics covered to those relevant to this
article. The first and most interesting concerns the short and long term prospects for
GOLD.

2.1 PROPHETIC SHORT TERM PROSPECTS FOR GOLD

A young friend with a powerful prophetic gift, first name Andre, and man the writer has
known for some years, rang a month ago with a simple question. Where did the writer
think the price of gold would be by the end of March 2009? A year ago the writer had
openly stated he thought the price would touch $1050 by July 2008, and reach $1200
by the end of December 2008. In the event it briefly touched $1030 in March. From
where the price was sitting at the time his young friend phoned, either side of $800 an
ounce, the writer thought he’d stick to his figure of $1200 but take advantage of the
extra three months. The young man was not in the financial business but this was the
reply he gave:

“That’s interesting Peter. This has never happened to me before, but I felt God
tell me GOLD would be $1300 by the end of March 2009.”

A week later the writer mentioned what had happened to a friend in the asset
management business, but a person who regularly attends a ‘prophetic school’. His
response was a confirmation. He related how the man who teaches them, first name
Rory, preached at a church in January. During his address he said:

“God has shown me that during the coming year a number of major international
institutions will go broke.”

A month later he told his pupils in a training meeting:

“I felt God show me that the price of Gold would rise to between $1100 and $1200
by Christmas 2008.”

Together the above two prophecies indicate a strong likelihood that the price of Gold
will rise sharply from mid-October onwards, reaching at least $1100 by Christmas, and
probably $1300 before the end of April 2009. Measured from gold’s price of $828 spot,
on Friday, October 3, the next 3 months should see a minimum 33% move to $1100 by
Christmas, and the next 7 months a 57% move to $1300. With everything else in
meltdown mode, the outlook for gold looks pretty good.

2.2 THE COLLAPSE OF CAPITALISM

At about the same time the writer received the first prophetic word on gold, he was
asked to meet a middle-aged man who wanted advice on ‘economics’. He said he knew
nothing about the subject but God had given him a strange prophetic word which he
wanted to pass by the writer. He felt God say to him that:

“Capitalism is about to collapse.”

 27

He asked if it was possible. At that stage the extent of the financial crisis was beginning
to impact the writer’s thoughts as he began to research for his article. He therefore
responded:

“I think you may have heard God correctly.”

That was two months ago. Had one put those thoughts to paper then they would have
been viewed as totally off the wall. Not anymore. The extent of intervention explodes
with every passing day. It certainly helped the writer clear his mind of all preconceived
ideas with regard to what was ‘theoretically acceptable’ for an erstwhile believer in free
markets. Now it’s happening and massive intervention is the only way to go, otherwise
we’ll all be back in a barter economy.

2.3 AN IRANIAN CLIMBDOWN BY CHRISTMAS?

Back in July the ex-South African Kim Clement, now resident in California, had a word
for what would happen in the Middle East this Christmas:

“This could possibly be one of the greatest Christmases ever for the troops in
Iraq and Afghanistan. I will embarrass Iran. Twice I will embarrass Iran as
it…attempts to do something against Israel. Watch how this Christmas will be
some of your greatest victories,” says the Spirit of the Lord.

The above word doesn’t necessarily imply a military strike. It could be that the threat of
a major US attack becomes so real that Iran simply capitulates, aided and abetted by
internal political pressure against the current president.

2.4 ZUMA WILL NEVER BECOME PRESIDENT OF SOUTH AFRICA

Subscribers may recall the writer’s article No. 81, entitled:

“ZUMA’S PHYRRIC VICTORY, ANC’S MOMENT OF TRUTH, YOUNG WHITES CAN

RELAX.”

It was dated February 12, 2008. The writer laid out two options for South Africa’s would-
be President. The first involved him telling the truth, going to jail for a brief spell, but
later becoming President. He failed the test, choosing instead the path of delay and
denial. At the time the writer was certain he would take a leap of faith and allow God to
change him. It was disappointing when he chose otherwise. A year ago an American
prophet, Lauro Adamo, visited South Africa. Amongst other things he said the following:

“The man they think will be President will not be President.”

At the time it seemed he was off beam but the sudden ousting of Mbeki has
dramatically changed the picture. The ANC called Mbeki to account and forced him to
resign. They nominated ZUMA’s right hand man, Kgalema Motlanthe, to fill the role of
President for a brief eight month period until elections in May 2009. It has given
Motlanthe an immense advantage and an opportunity to win the hearts of the people in
the interim. If erstwhile ZUMA supporters choose to implement Judge Nicholson’s call
for a full investigation of the Arms Deal, both ZUMA and Mbeki could go down together.
If not jailed, their reputations will both be irrevocably damaged, certainly enough to
preclude ZUMA from public office. Even if nothing happens, it would appear that
ZUMA’s day is probably over.
 28

2.5 A PROPHETIC FUTURE FOR THE SOUTH AFRICAN RAND

The same American prophet referred to above had an amazing and very encouraging
word for South Africa’s long term economic future.

“I foresee 100 years of prosperity…there is coming a time in the future when the
RAND will become stronger than the EURO.”

This is now the third time the writer has heard prophets forecast a strong future for the
RAND. On the two previous occasions they both concerned the RAND becoming
stronger than the dollar. Collectively they promise both economic strength through
rising prices for gold and commodities, but as important they foresee growing
confidence in the country’s political future. On both counts they ought to give
encouragement to young whites who have refused to emigrate. Those who have left
South African shores already may in time have cause to return. Do it soonest, first loss
best loss!

On the topic of the RAND, the writer believes that by the end of March 2009, South
Africa’s currency ought to have strengthened back from R8.75/$ at the time of penning
this, to R7/$ - a positive20% move, good for foreign investors as well.

2.6 PROPERTY PRICES IN CALIFORNIA – A REBOUND POSSIBLE?

In an earlier part of this article the writer referred to the recent 40% collapse in
Californian property prices, experienced since the June 2006 peak. The prophet Kim
Clement now lives in California. He felt God giving him a word of encouragement for his
state. It runs completely COUNTER to the worst case scenario predicted for American
property prices and the nation’s economy. However, if a radical fiscal strategy were to
be implemented with immediate effect, Clement’s vision would not be impossible. Here
is what he felt God telling him:

“Property, property, property, property is going to be yours, says the Lord. There
has been attack against your property, there has been attack against your homes
and your houses- to tear down your walls and to pull you out and minimize your
faith. God has said ‘Enough’. Now I say to you, property, property, property,
property – four times you will be restored, says the Lord. By March of 2009 it will
be a COMPLETE opposite to what it is now,”says the Lord.

Certainly if any fiscal intervention is to work, it must target both the housing market and
the real economy – not just the financial sector.

2.7 A NEW VEHICLE WILL EMERGE FROM FORD

In line with the writer’s own thoughts on the subject, Clement has a word regarding
America’s motor industry, specifically FORD.

“There will be a new vehicle that will emerge from FORD as it joins forces with
another motor company. It shall be something that shall stand next to every
European car.”

If Clement is correct it might well be that FORD beats its American rivals to the post by
launching an ELECTRIC car before anyone else! Those who are scathing in their
 29

criticism of the US Administration’s planned $25billion bailout of the nation’s motor

industry may in time have cause to reconsider.

It seems the moment has arrived for Americans to learn some tricks from the French. It
was the country’s current President, Sarkozy, who in earlier days as Minister of Finance
saw fit to intervene on behalf of French engineering giant ALSTOM, then verging on
bankruptcy. Five years ago Sarkozy made the salvage of ALSTOM the lynchpin of an
industrial strategy. Paul Betts commented in the FT last week:

“The French INTERVENTIONIST way of fixing industrial problems, seems to

achieve better results than the American way. The US also appears to have
reached the same conclusion – at least judging by the way the government is
now INTERVENING to save everybody, from the bankers on Wall Street to the
hard-pressed carmakers of Detroit.”

Capitalists and free market ideologues – of which the writer ‘til recently was one – are
having to learn new tricks!

2.8 CHINA TO BECOME AMERICA’S FRIEND

Financial analysts have long seen China as a rising threat to the international power
and influence of the United States. Their buildup of substantial dollar holdings via
surpluses on trade account theoretically places China in a position to call America to
account. The country’s rapid industrialization and double digit growth rates have
astounded economists. Chinese manufactured goods have flooded the world. Few
have been able to compete with her low manufacturing costs and fast improving quality.
Effectively China’s rising foreign exchange reserves are tantamount to her lending the
US huge amounts of money. So why should China wish to become America’s friend?

The industrialization of China was largely made possible because US companies were
willing to transfer whole factories and know how to an educated labour base. Twenty
million Chinese workers a year have been pouring in from rural areas, getting proper
jobs and acquiring skills they never had before. They rapidly learnt to manufacture the
same products at a fraction of US costs. This enabled American companies to compete
on a global basis, gain new markets, and make substantial profits. There are still 200m
rural Chinese waiting to join the flow to the towns. Increasingly the factories are being
brought to where they live. To date it has been a ‘win win’ situation for all concerned.
An erstwhile communist government has learned to adapt to capitalism, stayed in
power, and dramatically raised the living standards of its people. As her people become
more sophisticated, they will also become more demanding. Any major hiccups to
growth will rapidly lead to disaffection with those in government. It is overwhelmingly in
China’s interests to allow the deal to continue for at least another decade. That is why
Kim Clement was led to say:

“Watch out – China is about to arise. For the Lord Christ on high has entered in
beyond the Wall. China, you will fall into MY hands. I will shake the Kingdom of
darkness and show them MY Son. America! America! Do you know what I have
planned? There is hope, for China will take your hand. Together you will stand. I
will shake their enemies from them so that they will not look to the soil of the
Middle East. ” Instead God says: “I will surprise you by what I do with Asia and
the United States of America. Pray for China for I will raise them up. They need a
friend. Will you, will you, will you (America) be their friend?”
 30

From having persecuted Christians for so long, it would appear as if a massive revival
is about to break out in China. If this is the case, they certainly won’t be turning to either
Russia or the Middle East any more.

3.0 LATEST ‘PICK SIX’ – IN GOLD AND ENERGY

The last occasion on which the writer discussed his ‘PICK SIX’ was back in February of
this year. The stocks and their respective prices were as set out in Table 1 below. The
Rand/Dollar currency rates ruling on 12 Feb 2008 were R7.70$ versus R8.50/$ at the
beginning of October. The 17% fall in the Rand since August 4 – when the rate
strengthened to R7.25 – was largely attributable to a similar 17% crack in the CRB
Index of commodity prices. Most of that was due to a 12% strengthening in the Dollar
versus the EURO. In less than 8 weeks the EURO fell from $1.56 to $1.37 as Europe
slid into recession and the ECB began to ponder the growing need to cut rates.

TABLE 1
Stock Price - 12 Feb 2008 Price – 1 Oct 2008

Gold Price $916 (R7053) $840 (R7140)

(1) AFGOLD R2.45 ($0.36) R1.75 ($0.20) (- 29.0%)

(2) RANDGOLD R18.00 ($2.40) R13.00 ($1.53) (- 28.0%)

(3) GOLDFIELDS R107.00 ($13.80) R70.25 ($8.26) (- 35.0%)

(4) SALLIES R0.56 ($0.07) R0.64 ($0.08) (+14.0%)

(5) SASOL R350.00 ($45.00) R314.00 ($36.90) (-10.0%)

(6) URANIUM ONE R51.00 ($6.50) R15.50 ($1.82) (- 70.0%)

Average decline - 26%

The average 26% decline experienced in the Rand prices of the writer’s ‘PICK
SIX’ in Gold and Energy stocks as shown above, reflects a sharp 22% fall in the
CRB Index of commodity prices since July. Gold is down 18% from a mid March
peak of $1030, to a current level of $840. Oil is down 37% from $147 a barrel in
March, to $93 on October 1. Copper is down 33%, Uranium prices have more than
halved but over a much longer period. Now observe TABLE 2 below, the writer’s
projections for the NEXT seven months to the end of April 2009.
 31

TABLE 2
Stock Current Price 1/10/08 Projected Price 30/4/08
R8.50/$ R7.0/$
Gold Price $840 (R7140) $1300 (R9100)

(1) AFGOLD R1.75 ($0.20) R3.10 ($0.44) + 77%

(2) RANDGOLD R13.00 ($1.53) R26.00 ($3.71) + 100%

(3) GOLDFIELDS R70.25 ($8.26) R135.00 ($19.28) + 92%

(4) SALLIES R0.64 ($0.08) R1.10 ($0.16) + 72%

(5) SASOL R314.OO ($36.90) R475.00 ($67.00) + 51%

(6) URANIUM ONE R15.50 ($1.82) R37.00 ($6.40) + 138%

Average Projected Rise by end April 2009 + 88%

3.1 WHY SHOULD GOLD TAKE OFF OR COMMODITIES RECOVER?

The writer is projecting an average appreciation of 88% for his PICK SIX in gold and
energy stocks over the next 7 months. Is it possible and why should it happen?

a. THE CASE FOR GOLD

If one goes back to the illustration on the front page of this article, ‘BANKERS in a
JACKSON HOLE’, the answer to the Bankers’ problem is given as:

“PRINT or DIE!”

In other words, unless central banks intervene on a massive scale, with huge injections
of printed money, their economies are collectively set to slide into serious recession. In
a worse case scenario the world could collapse into a depression rivaling that of the
1930s. Even if America takes the actions required on her own, unless the rest of the
world follows suit and matches the scale of her interventions, US efforts will prove
insufficient to stem the tide. Fears are growing.

In response to Congress initially refusing to pass Hank Paulson’s $700billion bailout

package for the banking sector, the Dow crashed 777 points in a single day, from
11,143 down to 10,366. After the Senate passed a modified version a day or so later,
the markets rallied, but only recovered a portion of the previous losses. When Congress
finally approved the same modified bill at the end of last week, instead of recouping all
prior damage, the Dow actually FELL and closed Friday last week at a new low of
10,325! It was last there in October 2005. Three years earlier, on October 11, 2002, it
reached a multi-year low of 7200, in the wake of the internet crash. Last week’s close
has effectively retraced more than half the difference between the low of 7200 on 11
October 2002, and the subsequent all-time high of 14,079 on October 12, 2007.
 32

What is going on here? The market is telling those in authority that the bailout bill is
grossly insufficient. Far more has to be done or the slide will accelerate.

More and more investors are withdrawing money from banks and savings institutions in
order to buy PHYSICAL gold and silver. Members of GATA have been informed that
Bank of America is preparing posters to place outside its branches in the event of a
‘Run’. They will inform customers their bank has closed its doors until further notice. In
order to illustrate the increasing futility of central bank suppression of gold through the
‘futures market’, one needs to ask what vendors of gold coins are being offered for
physical delivery. With gold trading at $840 on Friday morning, coin dealers were only
able to supply half ounce Kruger Rands at $940!

Clearly, if the banking situation continues to deteriorate, the rush into gold and silver will
suddenly become a panic. Hence gold’s role as a perfect ‘haven in the storm’. In the
event that US authorities fail to intervene on the scale required, the price of gold will
explode. The writer’s forecast of $1300 by end April will prove conservative. The man
in the street is rediscovering gold’s role as the best ‘store of value’ in double quick time.

On the other hand, if world central banks rise to the occasion, printing money in direct
proportion to the collapse of credit, the price of gold will take off as the perception
grows that paper money has no foundation but can be created out of thin air for
nothing. First off, the price of gold will recover its multi-year relationship with oil and
commodities. Work on a simple ratio of gold being sixteen times the price of oil. So if
Brent Oil is trading at around $100 a barrel, the price of gold should be $1600 an
ounce. Some allowance will have to be made if ‘PEAK OIL’ becomes a reality. The ratio
might have to be reduced a bit. If oil recovers past its recent July top of $147 over the
next 6-12 months, gold would be worth in excess of $2,200. Over $200 a barrel for oil
within the next 24 months, gold should race up to $3,200.

b. THE CASE FOR OIL AND URANIUM

In the last but one issue of Fortune magazine, there was a six page article on ‘PEAK
OIL’ expert Matt Simmons. It was entitled: ‘The Prophet of $500 Oil’. Here are some
brief extracts:

“Simmons was transformed overnight from an influential industry expert to an A-

list pundit by the publication in 2005 of his book ‘TWILIGHT IN THE DESERT: The
coming Saudi Oil Shock and the World Economy.” Then more:

“Simmons believes that Saudi’s oil supplies are much more limited than
everyone thinks. Since then he has moved to the forefront of the ‘PEAK OIL’
movement – a once fringe but now growing contingent of oil industry veterans,
independent consultants, investors and academics who believe that world oil
production is at or near an INFLEXION point, after which it will fall inexorably and
fail to meet projected future demands…The era of easy oil is over…If he’s right,
current world oil production – 86 million barrels a day – is about as high as we’re
going to go….In 2005, when oil was $58 a barrel, he predicted it would be at or
above $100 within a few years. Now he sees it climbing to $200, $300, or
higher….If Matt Simmons is right, the recent drop in crude prices is an illusion –
and oil could be headed for the stratosphere.”
 33

Simmons mocks John McCain’s call for more offshore drilling. He claims that apart from
the Arctic National Wildlife Reserve, which could make a difference in a year or so,
remaining areas will take a decade or more to have any significant impact.

McCain states that the US will build 45 additional nuclear plants by 2030. Simmons
doesn’t believe that will make a difference either.

Here the writer begs to differ. What is interesting is that in the past week or so, the
world’s second richest man, Warren Buffett, made a handful of interesting strategic
investments. The first was to buy a controlling stake in Constellation Energy in the US,
potentially a major manufacturer of nuclear plants. French rival EDF already had a
small interest and was hoping to increase it after successfully taking over British
Energy. Buffett beat them to control of Constellation. His even more interesting deal,
albeit much smaller, was to buy a 10% stake in ‘BYD’, described by the FT as:

‘A Chinese electric carmaker, and rechargeable battery producer.”

Buffett’s man described the reasons for the deal as follows:

“BYD is at the cutting edge of battery technology and we believe electric vehicles
are ultimately where all technologies will go.”

The quickest way for the US to avoid getting scalded by runaway prices for oil is to
develop the electric car industry as fast as possible. Maybe building windmills is one of
the alternatives for generating electric power. That’s what Simmons and Boon Pickens
favor. Just warn migrating birds where one intends erecting those ultra-high windmills.

The writer is happy to stick with nuclear, electric cars and two out of Buffett’s three
investments. Goldman Sachs he can keep.

If oil avoids the Simmons’ projections of $500 a barrel and higher, but heads for midway
targets of between $200 and $300 over the next two to three years, uranium will surely
match those prices and more. At $250 a lb versus current depressed prices of $55, the
investment prospects for viable producers of uranium is exciting.

3.2 LATEST NEWS ON THE WRITER’S ‘PICK SIX’

Three Gold Stocks + Three Energy Stocks

THREE GOLD STOCKS

(1) AFGOLD – Current price R1.75 ($.20) – Projected end April 2009, R3.10 ($.44)
based on gold rising from $840 to $1300 and the Rand strengthening from
R8.50/$ to R7.00/$.

On August 5, 2008, AFGOLD posted a 37-page investor presentation on its website.

Based on the writer’s assumptions of a gold price of $1300 and a Rand rate of $7.00/$
by end April 2009, the net present value of AFGOLD’s Modder East mine would be
worth R4.75 per share. That’s according to AFGOLD management’s own calculations.
Apart from its Sub Nigel mine, AFGOLD has a further four projects, all of which look
promising over the short to medium term. The shallow Ventersburg prospect in the Free
 34

State looks the most interesting. It includes a high grade section containing 2.5m
ounces grading 8.9gms/ton. Both Modder East and Sub Nigel will be in production
before the end of 2009. The estimated cost of production for Modder East is a very low
$250/ounce. Based on the above official projections of earnings and discounted present
values, the writer’s price target of R3.10 by end April looks distinctly conservative and
will yield a 77% return from where the shares are presently trading. The price target
could conceivably add a further Rand to R4.10, giving a total return of 134%. The four
extra exploration targets are all thrown in for nothing.

In March 2008, African Global Capital purchased 152m shares from erstwhile
controlling shareholder Uranium One for R2.10 per share. That gave them a 29% stake
versus Uranium One’s remaining interest of 37%. They would have taken the balance
had Deutsche Bank and its clients, not threatened to revise the terms of its convertible
bond. They have the right to convert their R600m loan into new shares at R4.11/share.
In the event there is a change of control – defined as any shareholder acquiring over
51% - they are entitled to revise the conversion rate based on market prices. It would
probably have enabled them to cut the option price in half, down from R4.11/share to
R2.10. Instead of a 25% increase in share capital, it would have involved issuing a
further 285m shares, on top of an existing share capital of 524m, a 54% increase.

In order to facilitate the change Deutsche clients went short 50m shares lent them by
Uranium One. The share price crashed from R4.00/share down to R2.00! One
sometimes wonders why people like U 1, do the things they do! The behaviour of
Deutsche clients definitely contributed to unnecessary weakness in the price of
AFGOLD. The current level of R1.75 represents an attractive point of entry. In due
course, there is bound to be another buyer for Uranium One’s remaining 37%. This
share has great potential in the coming strong bull market for gold.

(2) RANDGOLD – Current price R13.00 ($1.53) Projected end April 2009 R26.00
($3.71) based on gold rising from $840 to $1300 and the Rand strengthening from
R8.50/$ to R7.00/$.

When Gold peaked at an all-time Dollar high of $1030 an ounce on March 17, 2008, the
price of Goldfields managed a temporary spike to R135/share. The Rand at the time
was R8/$. It was equivalent to a Rand gold price of R8240 an ounce. Based on gold
rising to $1300 and the Rand strengthening to R7.00/$ by end April 2009, it would yield
a Rand gold price of R9100 an ounce. On the assumption that the dollar remains
strong, around $1.36 to the EURO or better, the price of Goldfields would at least return
to its March high of R135.

What has the price of Goldfields to do with the price of Randgold? Once the
Randgold/JCI merger is completed early in the New Year, 80% of the merged group’s
assets will consist of shares in Goldfields. The current price of R70 for the latter, gives
Randgold a net asset value of around R18.00/share, of which R14 consists of shares in
Goldfields. If the price of the latter DOUBLES to R135 by end April 2009, the net asset
value of Randgold would improve to R32.00/share. If they pay a dividend of around
R2/share in the next couple of weeks, it the projected value would reduce to
R30.00/share. Once re-listed, the merged share should then trade at not less than
R26.00/share, DOUBLE the current price. In the meantime one would have had a nice
fat dividend as well!
 35

Although the time taken to sort this one out has been frustrating, it will all have been
worth it. Imagine if one had sold out in despair BEFORE the price of gold took off!

Randgold is a great investment – equivalent to buying Goldfields at a minimum 15%

discount. They have one more arrow in their quiver. The company has issued
R14billion worth of summonses against parties accused of stealing its assets. If over
the next two years a mere 10% of the claims ultimately prove successful, the share
price could DOUBLE again, from R26.00 to R52.00.

(3) GOLDFIELDS - Current price R70.25 ($8.26) Projected end April 2009 R135.00
($19.28) based on gold rising from $840 to $1300 and the Rand strengthening
from R8.50/$ to R7.00/$.

When Gold peaked at an all-time Dollar high of $1030 an ounce on March 17, 2008, the
price of Goldfields managed a temporary spike to R135/share. The Rand at the time
was R8/$. It was equivalent to a Rand gold price of R8240 an ounce. Based on gold
rising to $1300 and the Rand strengthening to R7.00/$ by end April 2009, it would yield
a Rand gold price of R9100 an ounce. On the assumption that the dollar continues to
strengthen to around $1.36 to the EURO by April next year, the price of Goldfields
would at least return to its March high of R135. That ought to be conservative.

Although the September and December quarters will still reflect low production figures
of around 800,000 ounces a quarter, they will enable Goldfields to complete its
restructuring projects. The March 2009 quarter should be a humdinger, back up to
1,100,000 ounces, giving an annual rate of 4.4m. More important, from a safety
perspective the mine will be a changed animal, no more extracting of pillars. It’s too
dangerous.

Over the next six years, the group’s South Deep mine will reach its initial production
target of 800,000 ounces a year, taking total annual output from 4.4m to 5.2million. If
the Kloof No. 4 shaft project gets the go-ahead in the next 12 months, South Deep
could eventually contribute an additional 400,000 ounces a year, pushing the total to
5,6m by 2014. That still leaves the South Deep Ore Reserve with a 50-year life at
800,000 ounces a year, 33 years at 1.2m. Output from South Deep and Kloof No. 4
shaft needs to at least DOUBLE to 1,6m ounces. Even a 25-year life is excessive. What
a deposit Goldfields has!

South Deep will be a fully mechanized mine. On a like for like basis, whereas Kloof
employs 16,000 workers, South Deep will only need 3,000.

Goldfields’ CEO Nick Holland recently delivered a presentation at the Denver Gold
Conference. It consists of almost 30 pages of slides. On page 5 there is a comparison
of the RESERVES and relative market CAPITALIZATIONS of the world’s top ten gold
producers. Goldfields’ reserves are almost equal to those of Newmont, yet the latter’s
market cap is THREE times that of Goldfields. If they included each company’s
respective RESOURCES there is little doubt Goldfields would be light years ahead of
Newmont. This mine represents great value. If any subscriber would like the writer to e-
mail a copy of the Goldfields presentation, please phone the office in South Africa at
27-21-700-4853 and ask for Charlene.
 36

THREE ENERGY STOCKS

(4) SALLIES - Current price R0.64 ($0.08) Projected end April 2009 R1.10 ($0.16)
based on a sharp recovery in prospects for the world economy and therefore the
prices of all commodities. SALLIES sneaks in as an energy stock because it is
used in the uranium enrichment process.

The company is in a significant turnaround situation. When Tom Dale and Johan
Blersch took over management of SALLIES in early 2007, the company was on brink of
liquidation. Repeated injections of cash were necessary. Tom Dale used to be the CEO
of the whole of Goldfields. Despite that, he faced a major challenge. Since then he and
Johan have done a magnificent job.

Production is back on track. Marketing has been totally revamped. Contracts have risen
from $155/ton, through $170, past the mine’s break-even level of $200, first to
$255/ton, then from last month the first contracts were signed at around $365/ton net.
From October 2008, all current contracts will be around $365/ton, if not higher.

The above sounds strange in view of the recent sharp corrections seen in the overall
commodity index. First of all, SALLIES produces Fluospar. As such, the market was
late to enjoy the price rises experienced by producers of other metals and minerals.
When the turnaround did come, it was driven by a significant increase in Chinese
demand. As the world’s major producer, it had the effect of reducing Chinese exports
from 1.2m tons a year back down to only 500,000 tons. The market has been
squeezed. Domestic prices are running around $440/ton. Although Fluospar is not
immune to a slowing in the world economy, it is relatively protected.

In recent months SALLIES have swung from being on a major losing streak to earning
substantial profits. With prices around $250/ton, these were approaching R4m a month.
Based on latest contracts they now range north of R10m a month and the company is
cash rich for the first time in years.

The company’s court case with American Bully Honeywell has taken a very positive
turn for the better. After extensive research into the history of the affair, SALLIES
Director Johan Blersch discovered that Honeywell had based its damages claims on a
misrepresentation of the facts. Sallies now has a stronger damages claim than
Honeywell. Most likely the claims will cancel each other out.

On the exploration front, SALLIES is on the brink of landing a most exciting new
deposit. It’s taking time to come through but in due course the fish will land.
When it does the company’s medium term prospects will enjoy an exciting fillip.

Most recently, the Board of SALLIES was greatly strengthened by the appointment of
Fred Roux as Chairman. Apart from being current Chairman of the go-ahead IMPALA
Platinum group, Fred is a close friend of Tom Dale and has been for some considerable
time. Do not underestimate the corporate strengths of this small company going
forward. Despite the turmoil in world markets, it will eventually abate as intervention is
increased to whatever the extent necessary to restore economic stability. By the end of
2008 or early 2009, SALLIES will be soaring. By end April 2009, the writer expects the
price to have risen from R0.64 on October 1, to at least R1.10. If panic pushes the price
below R0.60, use spare cash to pick up stock. Don’t be fazed. Buy when there’s blood
in the street. Trust good management and faithful shareholders to do the rest.
 37

(5) SASOL - Current price R314.00 ($36.90) Projected end April 2009 R475.00
($67.00) based on a sharp recovery in prospects for the world economy and
therefore the prices of all commodities, PARTICULARY oil.

Since the above was written the price of Brent crude has crashed from $93 to $84, and
the price of SASOL has plummeted from R314.00 to as low as R260.00! On top of that
shareholders are still smarting from the recent news that the EU has fined all producers
of wax – of which SASOL is the largest – for participating in an illegal price ring. The
size of the fine, some R3.7billion, amounts to 10% of SASOL’s total profits! Yet
evidence suggests the ring was started long before SASOL ever bought the company.
Hopefully SASOL will contest the EU’s claim.

It is always interesting to compare behaviour patterns in a socialist environment such

as Europe. No one would think to fine Labour Unions for ‘Wage Maintenance’ yet the
principle of a Cartel for Labour rates across an entire industry is no different to that for
Employers selling the final product at a pre-determined price in agreement with
competitors. In fact watch how fast unions would denounce ‘SCABS’ who dared to
accept any working wage BELOW the ‘agreed’ union rate!

The writer has dealt at length with the prospects for oil. There is no way the current spot
price of $84 a barrel can last unless the world enters a massive depression. To the
contrary, the writer is convinced the current panic is of a temporary nature. SASOL’s
internationally recognized technology is of such value that the company’s medium term
prospects are exciting. The writer has no reason to change his estimate that the price of
SASOL will be R475 by end April 2009 as the price of oil retraces its steps back up to
$147 from current levels of $84. The opportunity for exceptional low risk capital gain is
exciting. It is offering a potential appreciation of around 82% in 7 months.

(6) URANIUM ONE - Current price R15.50 ($1.82) Projected end April 2009 R37.00
($6.40) based on a sharp recovery in prospects for the world economy and
therefore the prices of all commodities, PARTICULARY oil and uranium.

During the market meltdown of Monday, October 6, average stock prices world wide fell
7%. There was a specific moment during the day when the Dow itself was off 900
points. The price of Uranium One got thoroughly hammered, falling 21%, from R14.20
to R11.00. For the year to date the stock is off 86%. Remembering its erstwhile all-time
high of R114.00 back in February 2007 is like visiting another country. Watching the
price of uranium scruff in the dirt at $55/lb after enjoying its moment in the sun at $138,
helps one understand why the sell-off has been so brutal.

In 3.1 (b) above the merits of oil and uranium were fully discussed. One further
comment is necessary. The day of the Electric Car is almost upon us. When it arrives,
nuclear will be resurrected. For subscribers who already hold Uranium One, the writer
has a simple word of advice. Add to your holdings, even if only as a token. The
company is not about to sink. Making a small purchase will help investors make up their
minds. The company will yet recover.
 38

CONCLUSION TO THE ‘PICK SIX’ - A LAST MINUTE ENTRANT!

When discussing the 4 STEPS the US Treasury and Fed ought to take to turn things
round, step number four was a plan to boost infrastructure. Richard Russell couldn’t
help laughing at the fact that both American Presidential candidates are committing
themselves to cutting government spending should either of them get elected. If that’s
the CRUX of their economic strategies they should both disappear in a cloud of smoke.
The next US Administration will be forced to launch massive spending programs to
provide jobs for their people in a time of crisis. Budget deficits are yesterday’s problem
if the alternative is an unemployment rate of 30%. Deficits can be dealt with in the
future. In any case, if the void of rolling deflation is filled with PRINTED money, it will
leave no burden of debt behind whatsoever.

In view of the above, the writer sees fit to ADD a further investment choice to his ‘PICK
SIX’. Number Seven will be the writer’s choice as the South African company best
placed to benefit from INFRASTRUCTURE SPEND over the next two years.

(7) CONVERGENET - - Current price R1.10 ($0.13) Projected end October 2009
R2.40 ($0.34) based on a rising stream of infrastructure contracts throughout
Africa.

Although one would normally have selected a construction and engineering giant like
Murray and Roberts, as first choice to benefit from infrastructure spend, the latter’s
attractions are well known and probably fully discounted. CONVERGENET on the
other hand is a relative NEWCOMER.

• It is a new multi-disciplined ICT infrastructure company with specialist focus on

‘infrastructure solutions and services’ in specific sectors appropriate for emerging
markets. (ICT = Information, Communication, Telecommunication)
• The company was founded in December 2006. Today it employs 600 people,
has 733m shares in issue and at its latest price of R1.10/share is currently
capitalized at R800m.
• The company places great emphasis on being liquid and debt free. It presently
holds R100m in cash. Should one say ‘In the Bank’? Possibly not!
• CONVERGENET and its subsidiaries have the skills, experience and resources
to do major, multi-discipline turn key projects anywhere in Africa.
• It is a company whose people are familiar with, and excel in, tough and
inhospitable operating conditions.
• The company’s major clients represent a who’s who of South African business,
from Barclays Bank to SASOL, BMW to MTN, AngloPlatinum to Murray and
Roberts.
• For the year to end August 2008, the company will probably earn 6cents a share.
• Companies in this field normally trade at 20x earnings, hence a price which
ranges between R1.10 and R1.20 per share.
• Next year the company is expected to DOUBLE its earnings per share to 12
cents.
• This would give the share UPSIDE potential to R2.40 over the next 12 months.
 39

A FINAL NOTE
As this article goes to print, the price of gold has already jumped over $880, while the
balance sheet of the Fed has almost DOUBLED to $1.5 trillion! The printing has
started BIG TIME.

The latest edition of the LONDON Financial Times carried an Editorial headed:

“All that glisters”

“Rushing into Gold could be a risky business”

The editor describes how the man in the street is beginning to pull his money out of
banks with the aim of re-investing it in various forms of PHYSICAL GOLD – a rush not
seen since the 1979 oil crisis. The FT, representing the eyes and ears of the Financial
Establishment in both Britain and the US is naturally concerned that if the trend
continues, their desperate efforts to rescue the banking system might prove futile. They
are determined to leave no stone unturned in an attempt to prevent the move into gold
from exploding. They warn that:

“GOLD’s appeal could prove illusory”

That is their determined wish to prevent it from happening. This time unfortunately they
are set to fail. They go on to add:

“AS long as the world’s markets and major currencies continue to gyrate, gold
will remain volatile. Sharp price swings do not mark it out as a RELIABLE store of
value.”

What they do NOT tell you is that it is their FRIENDS in the Central Banks who are
doing their utmost to curtail the rush into gold. The volatility displayed is the direct result
of repeated attempts by their banker friends to smash the rise of gold. The fact that the
overall trend is UP, demonstrates that their efforts are doomed to fail. Do not be
discouraged. Keep buying gold and gold shares.

The writer trusts this article brings a measure of light and encouragement to those of
his subscribers who have been hurt by current events.

Those with queries may contact the writer’s assistant, Charlene Key.
Telephone number +27 21 700 4880 (Cape Town)

PPS. As this report was about to go out the writer received an early morning phone call from Bill
Murphy of GATA. He was ecstatic about an article by South African Journalist Michael Coulson
giving credence to everything GATA has been saying for years – the price of GOLD has long been
manipulated by the Central Banks but their ability to continue to do so has run out of rope! A
copy of the article is attached. It is entitled: “GOLD – Safe Haven or Bull Trap”

If that was not exciting enough, the writer’s son phoned to read a short report by Javier Blas in
the LONDON Financial Times, totally contrary to the editorial above. It was entitled: “CENTRAL
BANKS ALL BUT STOP LENDING GOLD”. That too is attached.
 40

DISCLAIMER

Readers are advised that the material contained herein is provided for informational purposes only. The
authors and publishers of this letter are not acting as financial advisors in providing the information
contained in this publication. Subscribers should not view this publication as offering personalized legal,
tax, accounting or investment related advice. Readers are urged to consult an investment
professional before making any decisions affecting their finances.

Any statements contained in this publication are subject to change in accordance with changes in
circumstances and market conditions. All forecasts and recommendations are based on the currently
held opinions and analysis of the authors and publishers. The authors and publishers of this publication
have taken every precaution to provide the most accurate information possible. The information & data
have been obtained from sources believed to be reliable. However, no representation or guarantee is
made that the information provided is complete or accurate. The reader accepts information on the
condition that errors or omissions shall not be made the basis for any claim, demand or cause for action.
Markets change direction with consensus beliefs, which may change at any time and without notice. Past
results are not necessarily indicative of future results.

The authors and publishers may or may not have a position in the securities and/or options contained in
this publication. They may make purchases and/or sales of these securities from time to time in the open
market or otherwise. The authors of articles or special reports contained herein may have been
compensated for their services in preparing such articles. Peter George Portfolios (Pty) Ltd and/or its
affiliates may receive compensation from the featured company in exchange for the right to publish,
reprint and distribute this publication.

No statement of fact or opinion contained in this publication constitutes a representation or solicitation for
the purchase or sale of securities or as a solicitation to buy or sell any specific stock, futures or options
contract mentioned in this publication. Investors are advised to obtain the advice of a qualified
financial & investment advisor before entering any financial transaction.
 41

October 07, 2008

Gold – Safe Haven Or Bull Trap
By Michael Coulson
I am genuinely proud of the fact that when I was Chairman of the Association of Mining
Analysts we held two gold seminars at which the much reviled Gold Anti Trust Action
Committee (GATA) spoke. What they said about the gold market and the shadowy world of
derivatives has come home to roost, and with an accuracy that I cannot recall the like of in over
35 years as a stockbroker and mining analyst. Contrast their early decade comments with those
of London gold guru Andy Smith who forecast at the first AMA seminar that, after a short term
run, gold would fall to $65/oz. For that forecast to come true now would require the world to
suffer the worst deflation since the cavemen ran out of sharp stones eons ago!

In Wednesday’s FT, where the wish is always father to the thought, the mighty Lex once more
laid into gold. Of course his desire to see gold crash (or perhaps just fall back) will someday
possibly be realised. However it is clear that statements that jewellery demand is plummeting
show Lex has no understanding of the gold market. Unfortunately I can’t send him any of my
past annual Gold Books, as I am down to my last copy. If Lex had read them he would note that
when the gold price goes up because of investment demand, jewellery in volume terms falls; that
has been going on for decades, and when the price falls, guess what, volume jewellery demand
rises. However if Lex looks at the money into jewellery figure he will see over the longer term
that figure rises whatever the price of the yellow metal, all that happens is that when the gold
price rises sharply consumers buy fewer items or often simply drop their purchases down a
category to lower gold carat items – averaged over a period they do not spend less money.

So now we’ve got that out of the way what are we actually facing in the gold market today? The
gold price spent most of the summer trading between US$960 and US$740/oz, and primarily in
a downwards trend from mid July to early September as the financial crisis slowly but publicly
fermented. GATA cried foul and manipulation, and the ‘great and the good’ scoffed at GATA,
as they had done for the past ten years for daring to think that the authorities intervened in
markets, let alone gave the gold market a moment’s thought. Well several weeks ago as the
current financial crisis deepened a steady recovery set in. Then suddenly a couple of weeks ago
the dam burst as Lehman went belly up and AIG went into meltdown, in a matter of hours gold
had risen US$70/oz and burst back through the US$900 level. It was like the good old days of
the late 1970s when Iranian sabre rattling used to unnerve financial markets. Of course in those
days the only place the then tiny band of market cowboys, the derivative spivs, could get some
gold action was on the plain vanilla Winnipeg Commodities Exchange; there was, of course, no
borrowed central bank gold to play with back in those days.

As for the all too often-ignored gold mining industry, the long-term gold bears surely know that
all is not well. Production, despite several years of rising prices, is still trending lower, the great
gold fields of South Africa are now in their twilight years unless there is a sensational increase
in the gold price (think US$2,000 plus), and with ageing mines in countries like Australia and
stagnation in other major producing countries like the US and Canada, any hope of an increase
in mine output, despite China’s progress, is a forlorn one. Certainly nothing can happen in the
short or medium term, even attractive sizeable projects like Fruta del Norte in Ecuador and
 42

Tropicana in Australia are several years away. The current financial crisis has made it fiendishly
difficult to raise ‘speculative’ finance anywhere as the ashen faces of overseas exploration
company promoters, seen going around the City now that summer’s over, so eloquently bespeak.
Gold’s actual and relative strength against other metals seems to make little difference, if you
haven’t raised your money it’s a real struggle to do it now.

The other big problem facing gold mines and developers is the issue of costs. By the end of this
year average costs per oz across the global gold mining industry are likely to be not far off $500.
Add in non mining costs and there is little profit even at current prices for a significant number
of gold mines. Once again mighty South Africa is in more pain than most, and in that country
there is also the issue of political uncertainty and the fear that the next president (not counting
the present caretaker), probably Jacob Zuma of machine gun fame, will favour unions which will
mean further cost pressures on the labour front. At least any recession in South Africa at this
time will probably relieve some of the operating pressure on the mines caused by power
reductions which plagued them for months earlier this year.

One intriguing point in the supply/demand equation that is attracting a lot of attention at the
moment is the odd situation in the gold coin market. A number of major coin issuers including
the US Mint are having difficulties getting gold coin blanks, as physical gold seems to be in very
short supply. Of course a purist would, at times like these, find little of surprise in this supply
problem; after all when other assets are being trashed gold comes into its own, and there is quite
a trashing going on currently, leading to very high demand for gold coins which is being fed by
the fact that despite everything the gold price is experiencing high volatility both up and down.
Cynics in turn might see a great irony in this, for though there might be a big squeeze on
physical gold, there is clearly a very large supply of so-called paper gold (if that’s not an
oxymoron) in the marketplace! The supply/demand problem in the US particularly makes one
wonder if the US authorities are deliberately slowing Golden Eagle sales and pushing the gold
price down at the same time to discourage mass switching from bank deposits - real money (sic)
- to gold - real, real money. And if they fail what might be the chances that they repeat the
strategy of the 1930s and ban gold purchases by US citizens?

Of course gold is no longer a central part of the monetary system as it was then, but the 'land of
the free' is no longer quite what it was either." Can the paper gold tail continue to wag the
physically pressured gold dog? It seems unlikely, and when regulators eventually start to
examine the entrails of the horrific derivatives smash that we are currently seeing worldwide,
they may well decide that the whole gold derivatives structure needs unpicking. Who can forget
the farce of the late 1999 surge in the gold price, following the central bank agreement to restrict
gold sales, which led to both Ashanti Gold and Cambior almost going under because of their
toxic derivate positions. Do we think almost ten years on that those holding gold derivatives
now fully understand what they have committed themselves to? We doubt the management and
boards have a clue, even if the investment bankers behind the strategies claim that they
understand. In these days of increased legal board responsibility this lack of knowledge is
probably as good a reason and incentive for boards to sanction the closing down of hedge books
as the rising gold price itself.

So where do we go from here? Many commentators think that as recession forces commodity
prices lower and lower, gold will fall in tandem. There is also some confidence that the financial
crisis will soon be dealt with and things will return to normal, if slowly, as western nations,
particularly the US, avoid recession and the BRIC countries, particularly China, continue to
grow rapidly. Wishful thinking or calm wisdom? My bet is that gold has further to travel, as
does the economic crisis, and that US$2,000/oz is still achievable.
For more articles like this, register for FREE at www.minesite.com
 43

Central banks all but stop lending gold

By Javier Blas
Financial Times, London
Tuesday, October 7, 2008

http://www.ft.com/cms/s/0/f565b702-949a-11dd-953e-000077b07658.html?ncli...

Central banks have all but stopped lending gold to commercial and investment banks and
other participants in the precious metals market, in a move that on Tuesday sent the cost
of borrowing bullion for one-month to more than twenty times its usual level.

The one-month gold lease rate rocketed to 2.649 per cent, its highest level since May
2001 and significantly above its five-year average of 0.12 per cent, according to data from
the London Bullion Market Association.

Gold lease rates for two, three, and six months and for a year also jumped to levels not
seen in the last seven years.

Traders said the jump reflects the fact that central banks -- mostly European -- have
almost completely stopped lending gold in the last few days and are not rolling forward
old leases after maturity. This is because of fears that some borrowers might not repay
their bullion loans if they are engulfed by the financial crisis.

"A number of central banks have been cutting back on their gold lending," said Tom
Kendall, a precious metals strategist at Mitsubishi in London.

John Reade, a commodities strategist at UBS, added that there had been a lot of talk
about some central banks being unwilling to lend their gold because of a redoubled focus
on the risk of borrowers not returning it.

"There is very little appetite for unsecured lending at the moment," he said.

Central banks usually do not ask borrowers to post any guarantee -- or collateral -- to
secure bullion loans. "The key word now is safety," an official from a Europe-based central
bank said.

In normal circumstances, central banks lend gold into the market -- providing key liquidity
-- to earn a small return on what otherwise is a non-yielding asset.

Other factors are also pushing lease rates higher, including more investors' positions no
longer available for lending, according to Philipp Klapwijk, chairman of GFMS, the London-
based precious metals consultants.

Traders said the general dysfunction in money markets, with US dollar rates significantly
higher, was contributing to volatile gold lease rates. Demand for physical gold and small
and medium-sized bars had been strong, removing supplies from the market that
otherwise could have been lent, traders added.

The US Mint on Tuesday said it had run out of half-ounce and quarter-ounce American
Eagle gold coins following "unprecedented" demand.

Gold prices on Tuesday rose $19.3 to $880.6 a troy ounce, having hit an intraday high of
$890.6 an ounce. Bullion prices hit an all-time high of $1,030.8 in March. In euro terms,
 44

gold prices rose on Tuesday to a record high of E654.22 an ounce, above March's all-time
high of E651.24 an ounce. It also hit a record in Australian dollars.

Investors are seeking refuge in actual gold coins and bars as fears about the safety of
their savings increase. Some have even been selling their positions in gold futures, as this
is a less tangible form of the metal. Since the collapse of Lehman Brothers three weeks
ago, bullion prices have risen about 20 per cent.

-----o0o-----