Bond manager Bill Gross argues for dollar devaluation


12:53a ET Monday, January 13, 2003

Dear Friend of GATA and Gold:

The story from the Sunday Times in South
Africa that is appended here is sent to you
not for the investment advice it contains but
for the observation made by one of the
investment bankers quoted, Michael Schroder
of Old Mutual Asset Managers.

Speaking of prospects for the gold price,
Schroder says: "Central banks are the key
risk for the downside. Most of the key
holders are presently colluding to limit
their annual disposals and I would expect
them to continue to do so."

Of course the key word is "colluding."

Schroder's comment is an acknowledgement that
central banks work together to manage the
gold price. This acknowledges only what
should be obvious, for an open conspiracy -- a
conspiracy that called a press conference a few
years ago -- is what the Washington Agreement
was about.

Ordinarily exactly how far this collusion has
extended, exactly which central banks have
been involved directly and indirectly, exactly
how they have colluded, and to what purposes
exactly would be the stuff of basic journalism,
the follow-up to that press conference. There is
no more important news story, for this one
involves not just public policy; it involves the
disposition of all the money in the world and the
value of all labor.

And yet there are probably not two journalists in
the world who will pick up the telephone and call
a central banker to pose these questions. Some
journalists have the nerve, without making even
one such phone call, to assert on their own authority
that central banks do nothing contrary to the
interest of a free-market price for gold.

That's not journalism at all. It's disinformation,
which is what most journalism about the gold market
seems to be.

CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.

* * *

Bully for bullion

Jeremy Thomas
Sunday Times, South Africa
January 12, 2003

The past five years have provided some happy
memories for gold bugs, but how long will the
party last? Some veteran analysts, such as
Clive Roffey and Victor Hugo, say the good
times have only just begun -- and their views
are cautiously supported by the managers of
the best-performing local and offshore unit

For offshore investors, the winning name was
Investec GSF Global Gold. It came tops over
one and three years, and was narrowly pipped
over five years by perennial outperformer
Orbis Global Equity.

Investec portfolio manager Daniel Sacks says
the fund's recent outperformance rode on the
back of the dollar gold price, which jumped
25% last year. However, the bullion price in
the four years to March 2002 failed to hold
above the $300/oz mark. So what was the
secret to the fund's amazing returns in the
stagnant years?

"We have employed three strategies in
managing the fund," says Sacks. "First, with
the run in the gold price we took the
decision to give investors maximum leverage
to it. We therefore switched out of goldmines
hedging their production and shifted our
focus to the more leveraged counters.

"Second, the gold sector is going through
consolidation as it is still a very
fragmented industry. Identifying possible
corporate targets, such as Aurion Gold, which
was recently acquired by Placer Dome,
benefited the fund over recent months.

"Finally, we shifted our focus to South
African gold companies. Owing to the extreme
rand depreciation in 2001, and despite the
recovery, South Africa remains the cheapest
place in the world to mine gold. However, on
a price-to-earnings basis and a market
capitalisation-to-reserve ounce basis, South
African gold counters are still a lot cheaper
than their North American and Australian

Investec's biggest holding is Harmony Gold,
which satisfies all three strategies. Sacks
says gold is likely to benefit from the
weaker dollar, the uncertainty in stock
markets and inflationary pressures. This
should in turn trigger further investor
demand, which will push up the price -- and
have a knock-on effect on mining company

"The sector's ability to maintain high
margins and strong cash flows, even in the
recent subdued economic and commodity
climate, has improved investor perception of
its inherent quality," he says.

Last year, the market's negative reaction to
the leaked mining charter drove down prices
and left resources sector valuations at
attractive levels, says Sacks. He does not
expect the two impending decisions affecting
mining - the Money Bill and the Black
Economic Empowerment scorecard - to contain
any material negative surprises. "We,
therefore, remain confident buyers of the
sector on any share price pullbacks."

The winning domestic fund over one and three
years -- just beaten to the five-year laurels
by close cousin Liberty Resources -- was Old
Mutual Gold.

Michael Schroder, head of equity research at
Old Mutual Asset Managers, says the gold
price is still low by historical standards,
and the fundamentals are positive. "Central
banks are the key risk for the downside. Most
of the key holders are presently colluding to
limit their annual disposals and I would
expect them to continue to do so," says

"History has also shown that central bankers
are not really good at it, as they tend to
sell when the price is low and change their
mind when it is going up. At the moment they
are facing a tricky situation, with an
unprecedented general unattractiveness of the
world's major currencies. The US dollar is
overvalued, the yen is zero-yielding and the
euro is in danger of failing. So, maybe we
will see the Bank of England repurchase that
gold soon -- which they sold at the bottom --
now that the price has gone up."

Historically, gold shares have been tightly
correlated to the gold price. But the rand
has appreciated more than bullion has. The
result, says Schroder, is that South African
gold mining company earnings will come under
pressure in the short term.

"I am expecting some real weakness when the
reporting season kicks off later this month.
The problem is that the shares are already
highly rated. They clearly need the gold
price to strengthen a lot further and/or the
rand to weaken in order to maintain their
current levels."

William Gray, manager of the winning offshore
fund over five years, Orbis Global Equity,
says the key for investors in the current
ugly bear market lies in stock picking. This
is brutally brought home when you consider
that the fund fell 6.5% in December, bringing
its year-to-date decline to 10.3%. Against
this, the benchmark FTSE World Index lost
19.1% in 2002.

"While investor expectations have not been
lowered sufficiently to cause global equities
to decline to levels presenting pervasive
fundamental value, we continue to find
interesting stock-specific investment
opportunities," says Gray.

"We believe our focus on fundamentally driven
active management will continue to allow the
fund to participate in bull markets and yet
contain losses in periods of below average
stock market returns."

In South Africa, Stephen Mildenhall, the
chief investment officer of Allan Gray Equity
Fund, says domestic industrial shares are
attractively priced, given their depressed
earnings. "These have been trading at their
lowest relative levels in about 25 years. The
strong rand has exerted further pressure on
resource stock prices, where we are
increasingly finding compelling valuations.
The overall market is now considered to offer
compelling long-term value."

Mildenhall's fund fell out of the top 25 over
five years, but is handily placed at 16th
(out of 219 funds) over three years and is
fourth (out of 363 funds) over the 12 months
to December.

John Biccard's Investec Value Fund was the
third-best performer over one year, beaten
only by two speciality unit trusts, the Old
Mutual Gold Fund and the Standard Bank Gold

"From the beginning of last year the fund was
positioned for a strong rand, which paid off
very well for us," says Biccard. "Second, the
fact that people were selling all their local
shares in the early part of 2002 and paying
just about anything to get into rand hedge
stocks, provided a great opportunity for the
fund to take the other side of that position.

Related to that is the fact that the fund was
invested predominantly in the mid- and small-
cap sectors, where most of the local shares
are found. This is where all the value was,
as mid-cap stocks outperformed large caps
from March by more than 40%."

Looking ahead, the picture is not quite as
clear now as it was a year ago, he says.
"Many of the valuation gaps between small
caps and rand-hedge stocks have narrowed,
leaving less inefficiencies to exploit this
year. While the fund is still predominantly
invested in small and mid caps, large caps
now constitute about 15% of the fund,
compared with the beginning of last year,
when the fund had no exposure to them. It's a
stockpicker's year."


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