The Case for Gold and AFG

Thanks to all my followers (If this carries on, I could be like "Brian" of Monty Python fame..) :¬))

Anyway, As the Old year closes I thought a brief review of AFG to remind people of what we have here.

1: A little over 18 months ago, this share was just 2p.
2: Five new directors each put up £100k to kick-start/re-launch the company.
3: Institutional investment added £2.44m some months later to buy new licences.
4: A spate of buying and JV's means we now are not dependent on Zimbabwe.
5: The money is in place to re-furbish the Inez plant & produce ≈20,000oz p.a.
6: This is now underway, and a more stable ZIM dollar as inflation abates.
7: Konongo had it's initial estimate of 860,000oz upgraded after due diligence.
8: The Banka licence has 8Km (5 miles) of ore bearing rock at the surface.
9: This should allow us to produce 100,000 oz p.a. BUT could easily be 500k oz.
10: Gold has risen over 12mths from circa $385 to $440 and will go further.
11: China, Indonesia, India, Russia, Japan ALL have major $ holdings and plans to diversify into other currencies - My bet is that GOLD will form one of them.
12: Some stake building has been going on with a group of individual investors holding a substantial stake according to one recent report.

If I had more cash to add, I would. I suspect before end 2005 AFG will be 20p.

W.S.

And this is why...


WHAT TO DO ABOUT THE DOLLAR
by Brian Durrant

The last quarter of 2004 will be remembered for a mass
of financial events and economic signals.

Over the last 12 weeks, we have seen weaker than
expected economic data coming out of the US...a rally in
crude oil price take it over $55 per barrel (West Texas
Intermediate) in late October before falling back below
$40...and a Republican President Bush re-elected with
enhanced majorities for the Republicans in both houses
of Congress.

But despite these varied and fluctuating influences, one
market has been going in a straight line: the dollar. In
only the last three months, it has fallen by 10% against
the pound to touch a 14-year low. At one point, it
clocked up its eighth consecutive week of declines on a
trade-weighted basis.

That's the history - what next in 2005? The most popular
explanation for the dollar's weakness is America's
yawning trade deficit. Americans are consuming $20 for
every $19 they produce, and the US trade deficit is
approaching $2bn a day...or 6% of its output. As the
economist Herb Stein quipped, things that can't go on
forever, generally don't. And there are three broad
approaches to dealing with a trade deficit.

The first is for economies other than the US to take up
the mantle of driving global growth forward. If Euroland
were to achieve a growth of domestic demand comparable
with the US, for instance, it would be an expanding
market for US exports.

Alas, the chances of this happening are remote. A strong
monetary stimulus is unlikely to come from the anti-
inflation nuts at the European Central Bank in
Frankfurt. And a powerful package of tax cuts or
increased public spending is a non-starter, because each
economy in Euroland is compelled to observe the
strictures of the Growth and Stability Pact...or at
least, to avoid breaking those strictures more
aggressively than they already have.

The second solution is for Americans to spend less and
boost their savings. This is also a non-starter. To
eliminate the trade deficit, American GDP would need to
fall by a sixth. That would be a depression far greater
than that seen in the 1930s.

Neither is there is any way the US government will
change its ways by cutting public spending and raising
taxes. Nobody who matters in Washington cares about the
twin deficits. Indeed, following Bush's re-election,
taxes will probably be cut again. The Bush
administration will only worry about the budget and
trade deficits if there are nasty consequences in the
form of higher interest rates.

So with no change of policy from the ECB or the Euroland
governments...and no end to America's reckless
consumption in sight...the burden of the current account
adjustment falls on the exchange rate. A weaker dollar
will make US exports more competitive - and at the same
time make US imports less competitive. Simple.

But the trade deficit does not explain everything. If
this were the case, why do the three economies with the
strongest currencies over the last two years - South
Africa, New Zealand and Australia - all have trade
deficits, too? Nor does it explain why the US dollar was
strong in January 2002, when the US trade deficit was
also substantial.

Fed Chairman Greenspan is not known for his candour. But
last month he made a clear comment on the dollar. He
said, "Given the size of the current account deficit, a
diminished appetite for adding to dollar balances must
occur at some point."

Additionally, the Fed Chairman stamped on suggestions
that the world's central banks should prop up the dollar
with co-ordinated intervention in the foreign exchange
markets. This was a bombshell. The euro rose against the
dollar by 4% in just two weeks. Yet the preceding 20%
drop which President Bush oversaw during his first term
in office did not do the Republicans any harm
electorally. Most Americans would not have noticed that
it's more expensive to go abroad. Indeed, you could say
that in the last four years President Bush has been
doing US citizens a favour, by borrowing as much as he
can at just 4% from gullible foreign investors...and
then devaluing the dollar before he repays those debts.

Since Washington's growing budget deficit is the
principal cause of the worsening trade gap, you could
say the flow of money from Asian central banks to the US
Treasury is the biggest charitable aid programme in
history. But it is the Asian central banks that are now
holding the baby. Belatedly, they have realised that
they are overexposed to a falling dollar. Some are
employing their exit strategy.

The Russian central bank has said that it will allocate
a higher proportion of its $113bn foreign exchange
reserves into euros at the expense of the US currency.
Indonesia, which has $35bn of reserves, has suggested it
might cut its dollar holdings if the greenback continued
to slide. An official at Taiwan's central bank - with
$239bn in dollar reserves - suggested those holdings
should be cut.

The really big players are Japan and China, which
account for the bulk of Asia's $2,300bn of reserves.
They have the unenviable task of reducing their dollar
exposure without causing a rout in the foreign exchange
markets. A controlled dollar devaluation is the best
they can hope for.

With this background, it is easy to see that the dollar
has further scope to fall. But how much further?

Virtually every day in autumn 2004, the media announced
that the euro had touched a new all-time high against
the dollar. But you don't get much of a perspective,
because the single currency has only been in existence
since January 1999. Look instead at the longer history
of the dollar/deutschemark rate, and the all-time low
was 1.3445 recorded in March 1995. This equates to a
euro/dollar rate of $1.45, an objective that should be
achievable early next year.

As for the pound in your pocket, that 1.3445
dollar/deutschemark equates to a sterling rate of
$2.10...if sterling manages to overcome Britain's own
twin deficits of surging government debt and a worsening
trade gap...and holds its value versus the euro. At
first glance, British consumers looking to enjoy a cheap
holiday in Florida may think that $2.10 is a brilliant
piece of news. But the impact on Britain - and not just
on our own balance of trade, already suffering due to
record levels of imports - could prove disastrous for
your investments.

Companies in the FTSE 100 index derive around 30% of
their profits from the US. The pound has appreciated by
42% against the dollar in the last three and a half
years. That will directly affect the bottom line.

Moreover, some of the biggest UK-quoted companies -
including Astra Zeneca, HSBC and BP - report in dollars
and pay their dividends in dollars, which are worth less
when converted into sterling.

But the clearest impact of the declining dollar on your
prosperity comes in the value of US investments. You
don't have to own US equities outright to be affected,
however. US equities account for between 10 and 15% of
monies managed in UK pension funds. So a fall in the
dollar by 25% in the last 15 months will blow a
substantial whole in your funds performance. It may be
difficult to avoid taking this pain with your pension,
but on shares you own it makes sense to reduce your
exposure to the US.

But it's not all gloom and doom. Those British investors
who have borrowed in dollars over the last fifteen
months have been sitting pretty. Interest payments in
sterling terms have fallen by 25%. It is still possible
to take out a dollar mortgage on your property. But you
should be mindful that a rally in the dollar would
result in your interest payments going up. Also, if
you're taking a dollar loan out now, make sure you get a
fixed rate.

Finally, if you hold any gold, don't sell yet. Gold has
always been a safe haven asset in times of currency
debasement. The turmoil ahead - which could result in a
sudden and sharp drop in the value of sterling versus gold
before the end of 2005 - means we are looking for an
assault on the $500/oz level before too long.


Best wishes for the New Year,

Brian Durrant
for The Daily Reckoning

Editor's Note: Brian Durrant first urged readers of the
Fleet Street Letter to buy gold back in 1999. If you had
been with him back then, your investment would have
risen 63% in dollar terms since then. Your 'golden
anchor' would be 35% more valuable in sterling, too.