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Send  Share  RSS  Twitter  17 Feb 2010

RESOURCES: Gold Poised to Resume Bull-Run


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Sell gold shares and buy Krugerrands (KRs), Alan Demby, executive chairman of the South African Gold Coin Exchange, said in Johannesburg yesterday.

“I proffer such advice not only to individual investors but to fund managers as well. They, after all, are responsible for achieving the optimum returns for their investors and I humbly suggest that the gold shares they hold in their portfolios are dangerously vulnerable to nationalisation, not to mention labour action and underground incidents.”

He believed that the current time was ideal for actioning such a strategy, since in the wake of a period of relative weakness, occasioned principally by dollar strength, gold was poised to resume its bullish undertone in the near future. He predicted renewed gold strength on the back of an end to the dollar rally.

Demby suggested that short-term cyclical analysis supported his argument, juxtaposed upon longer-term factors centred principally on the likelihood that Congress and the Obama administration would soon pump more financial-stimulus money into the American banking system in reaction to recent net job-loss statistics.

Demby cited last week’s observations by US Global Investors’ CEO, Frank Holmes: “Both keeping rates near zero and expanding the monetary base are negative for the dollar, and thus positive for gold. We’ve seen that after a period of money-supply tightening in December and January, it appears that money is loosening again.

“The federal deficit is pegged at more than $1 trillion this year and more than $8 trillion through 2019—this will slowly weigh on the dollar. On top of that, the Troubled Asset Relief Program (TARP) money being repaid by banks is not being removed from the monetary base—we shouldn’t be surprised if that money is used as a stimulus booster shot ahead of the 2010 midterm elections.”

Demby also referred to data from Bloomberg News to the effect that the UK’s Royal Mint had more than doubled gold-coin production last year as investors diversified into physical assets. Output rose to 125 469 ounces from just 46 315 ounces during the previous year.

“Gold coinage is clearly a hot favourite among bullion investors, largely because buying gold shares exposes one to risks of threatened nationalisation, underground accidents and labour disputes.”

While acknowledging the attraction of exchange traded gold funds (ETFs), Demby emphasised that coins are more suitable for retail investors and collectors and far more easily divisible in estates.

“Those who buy gold bars and Krugerrands (KRs) totally avoid mining risk. In addition, they acquire an asset that is internationally marketable and that requires little care.”

He highlighted a common South African misconception that buying gold bars was equivalent to buying KRs.

“There is a significant and critical difference between the two. Since the former is not legal tender it attracts VAT; KRs, as official legal tender, do not. Why pay 14% more than you need to for peace of mind?”

Demby recommends that 15% of every investment portfolio comprises gold, including KRs and collectable coins.

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