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Essay written in November 2007 - note how things have changed

Hi all

We are witnessing world history and who knows what effect this will have on our businesses. I thought you might be interested in the following:

Gold is almost at R5,500 an ounce with the Rand pretty stable and currently R6.48 to the US Dollar. Gold is currently $838.35 an ounce (up 2% so far today) = R5,432 an ounce. Silver is currently $15.87 (up 8% so far today- but been trailing gold somewhat lately) = R102.84. Both all time highs in Rands.

USDX (US$ Index, a measure of the US $ in terms of 5 other major currencies, eg Yen, Pound, Euro, etc) still plummeting after following through its 30 year baseline at 80 (currently 75.324) in September when Bernanke (the Governor of the USA Reserve Bank, called the "Fed" (Federal Reserve) over there) dropped interest rates because of the sub-prime problems and record housing foreclosures in the USA. For the first time in many years internal politics superceded external politics.

We are almost at gold's (nominal) all time high around $850 set in 1980! But gold's all time high in real terms is $2,278 (accounting for USA inflation since 1980) which is potentially R15,000 if the Rand Dollar doesn't change! (See http://www.zealllc.com/2007/cpigold2.htm for more information.)

Although South African gold shares are suffering, internationally the HUI (unhedged gold index) is at an all time high. The Gold-Oil ratio is at about 8.8. Oil is at $95.38, an all time high. The average long term Gold-Oil ratio is 15.3 ($838.35/$95.38), so theoretically gold should be $1,459. This tells us the amount of gold one needs to buy a barrel of oil.

The international oil stocks index (XOI) and oil are at all time highs, but this is due to a speculative driven parabolic increase since early 2007 (up about 90% in one year), so oil is due for a correction, possibly down to its 200 day moving average around $70, which is still a 40% increase this year. Interesting though, the price of petrol in Rands is up "only" 20% from R5.66 to R6.76 since January 2007 which shows the real strength of the Rand increase this year compared with the Dollar. If the Rand had stayed where it was, we'd be paying R10.75 per litre.

Notes

An ounce is roughly 29 grams, so gold at R5,500 per ounce is roughly R159,000 per kg. Gold mines usually quote income and costs in kgs.

HUI (unhedged gold mining companies index): What does it mean?

The hedge book represents sales at a "forward" (future) price of gold, eg 40% of production sold at $400 an ounce is not good if gold is at $850 an ounce, but the hedge is important if you are starting a new mine as the lenders want to ensure you get a "lowest price." Major gold miners have been dramatically reducing their hedge books for the past few years so that they can immediately feel the effect of gold price increases. The main reasons South African gold shares haven't increased as much as their counterparts overseas is the depth we need to mine at; the cost of labour, especially in terms of labour strikes (come on guys, pay your people more); and the huge cost increases in terms of machinery, etc. But the machinery cost increases have effected miners worldwide, so should not be the major reason for blame in South Africa! Note that small miners or newly listed miners usually need to hedge part of their production to satisfy the lenders that there is a minimum price that they will get for their commodity, eg gold.

Sub-Prime:
This is not about lending at 3% under prime, but rather about lending to people with bad credit histories, eg people who have been blacklisted or bankrupt or where with .5% interest rate increases won't be able to repay their mortgages! Huge increases in bond interest rates in the USA from 1% to about 5% (a 500% increase in repayments) in the past couple of years required to prop up the Dollar and prevent foreigners from dumping Dollars led to huge internal problems in the USA. Bernanke had to make the tough decision to reduce interest rates to save the average American knowing that foreigners would sell Dollars. The benefit of this though is that this makes USA goods cheaper which should make USA cars cheaper than their equivalent European cars in South Africa.

Note that I have tried to deal with the facts and leave out my own opinions on where the current situation might lead us.

Please note that I am not a financial adviser or trader and am not giving you this information to suggest that you buy or sell shares and or commodities. I am simply a spectator on the world stage, trying to make sense of the bigger picture at work here. Those of you who know me personally will know that I have no idea who the South African rugby teams are or who will win Big Brother. I did however enjoy the world cup and kept watching out for hookers but didn't see any Any decisions you make as a result of reading this email are entirely up to you.

Regards
David

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