by John Lee, CFA
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05/27/2008

In October 2007, when gold was USD 750/oz and a US Dollar fetched 7.5 Chinese Renminbi Yuan (RMB), I published an article titled “Gold and RMB – Last Shoe to Drop for the dollar”, in which I said:

For a US family that spends $300 to $500 a month on Chinese goods, a further 40% appreciation of the RMB will translate into a $100 to $200 monthly cost increase. The logic of asking the Chinese to revalue their currency upwards is no different from asking the Saudi’s to jack up their oil price further, which is no logic at all for a US consumer.
Holding Dollars is like playing musical chairs. When the music stops, the one holding the most Green IOUs, loses.

1. With a rapidly sinking Dollar vs. western currencies, the Dollar’s supreme image is now very wobbly.
2. Having built up a war chest of USD 1 trillion, the Chinese need no more Dollars to shore up confidence in its own paper within the international arena

Combining these two factors, the Chinese government will likely loosen the RMB peg to the Dollar at a faster pace, and we expect a minimum of 20% appreciation in RMB over the Dollar (i.e 5-6 RMB to 1 USD) in the next 12 to 18 months. Gold is international money, and will follow the RMB’s suit and climb to over $1,000/oz over the same period. This gold target is a conservative estimate given that other commodities from oil to copper have all quadrupled from their lows this decade. Gold’s low was $250/oz in 2001.
Gold and the RMB’s rise will be the final chapter to the Dollar’s status as the world’s reserve currency, and the end to an era of low priced Walmart goods made in China.

-John Lee, October 27 2007
Now, 7 months later:
The RMB has since appreciated at the fastest 6-month pace on record, up over 7% and cracked through the psychological 7 RMB/USD barrier to trade at 6.95 RMB/USD. The talk of demanding the Chinese to revalue their currency has all but disappeared.

3 year RMB exchange rate to USD, no signs of slowing down
Gold met our 12 month target in 4 months and surpassed USD 1,000/oz in March 2008.

2 year gold chart, ready to take another crack at $1,000/oz
Fast-rising commodity prices and appreciating RMB are putting pushing up prices of everything measured in USD. Unheard of in the past decade, computer prices are going up for the first time in recent memory.
2009 Gold Target: USD 1,300/oz based on 5 RMB to 1 USD exchange rate
Let’s do an experiment: If we fix the RMB-denominated gold price constant at today’s closing of RMB 6,425/oz, the price of gold will reach USD 1,285/oz should RMB reach our target of 5 RMB to 1 USD by the end of 2009.
There are those who predict a rebound of the dollar index and a protracted USD 800/oz gold price or even lower. They just don’t get the message. Gold is an international market. Physical gold demand is mostly from Asia and as long as Asian currencies keep strengthening, the USD-denominated gold price will keep going up, regardless of what happens to the US dollar index.
Our 2009 gold target of USD 1,300/oz does not factor in external elements such as geo-politics or the speculative herd-following frenzy. I have a feeling this once-unthinkable 4-digit target will turn out to be too conservative.

John Lee, CFA
johnlee@goldmau.com
+1.800.965.6404
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05/12/2008

Here we are in May, and everyone asks the question, is it time to sell and walk way? Well that depends what you are holding. This article focuses on timing in regard to the junior resource mining equities, for which we use the S&P/TSX Ventures Composite Index as a proxy.

Resource Junior Sector Roller Coaster

Over half of our fund’s portfolio of 50+ junior issues are trading 50% below their peaks, and I suspect many other junior resource investors are in the same boat. Indeed, despite oil and gold trading at all time record highs, the TSX Ventures Composite Index (“Ventures Index”) is trading near its 2 year low. Investing in juniors in the past 2 years has not been for the faint-of-heart and the Ventures Index has made several round-trips between 3,300 and 2,500, highlighted by a stunning and record 33% drop last August.

Good fundamentals of underlying commodities

I have been hearing oil bears talking of a big correction since oil was $40. While I can’t tell you where oil is going, the chance of it ever going below $100 is diminishing rapidly by the day, as the chart indicates strong support at 200 DMA (day moving average), which is $95 and rising.

Gold has been a lagger relative to oil. Gold price is currently sitting at $880/oz and the chart indicates good support at $850, its 1980 high and support at its 200 DMA of $830, which continues to rise. We project the next leg up for gold later this year will be to take out $1,000/oz with ease.

Junior Shares: Buy or Sell?

Below we show the chart of the Ventures Index divided by gold.

This ratio indicates the relative value of junior mining shares compared to the price of gold.

As the chart indicated, resource equity investors did well by selling in April of 2002, 2004, 2005, 2006 and 2007 (red circles).  Is selling resource equities the right move again in Spring 2008?

One might think so; however, this chart is sitting at 7 year low since the bull began in 2001 and it is a hard case to argue against investing in the Ventures Index if you don’t see gold and oil staging a spectacular 30%+ crash.  Another way to put it: I see the risk of getting in the Ventures index as very low unless oil and gold crash 30% in the next 2 months.

Technically, as we saw before, The Ventures Index is currently trading at 2,500, lurking right beneath its 50 DMA. I track dozens on dozens of junior issues and many are staging similar breakout patterns by Knight Resources (KNP.V) and Independent Nickel Corp (INI.TO) below.

On April 8, I published an article titled “The start of the run for gold (shares)”

http://www.goldmau.com/content/contributors/lee_john/08-04-09.php
From that article:
“It makes no sense that the American mortgage crisis is impacting Canadian gold and resource juniors. One can now margin at 5% to buy oil trusts paying 15% dividend and gold juniors for less than $10/oz in the ground. I am confident the situation will reverse, offset not by higher interest rates but by higher junior stock prices.
Within two months and as soon as we hit the bottom of interest rates, I expect all the hoarded money to spill out looking for a new home as it simply does not pay to park money earning 2% with real inflation running at double digits.
­-John Lee, April 9 2008

Now a month and another interest cut later, we are indeed seeing revival of the Ventures Index and I expect it to break out of 2,500 level to test 200 DMA of 2,750 shortly.

John Lee, CFA
johnlee@goldmau.com
+1.800.965.6404
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by John Lee, CFA
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05/02/2008

Money serves as a medium of exchange and store of value. Price provides an important clearing mechanism in a society. Here we are going to explore the interesting dynamics between money and price.

In a free market, when the quantity of money is fixed, the fact that the price of an apple is $1 and that of a Parker pen is $2 has tremendous implications. It takes knowledge, ingredients and time to grow an apple while it involves branding, material, and capital to produce a Parker pen. What the market says here is that the total efforts put into producing the pen are worth twice as much as the efforts of growing the apple. There are thousands of valuations communicated through the market by this simple exchange. Over time, with advances in technology, it takes fewer efforts to produce more goods. The same farm that used to grow 10,000 apples can now grow 20,000 in half the time. While the ratio of exchange between apples and pens might still be 2 to 1, since it also takes less to produce a pen, in a world where the quantity of money is fixed the price of both apples and pens should decrease (i.e. 80 cents for an apple, and $1.60 for a pen).

The decrease in the price level of goods represents an economic advance and an increase in the value of money. As the human race progresses and wealth is being accumulated, shouldn’t people be able to buy more with less money? Shouldn’t people be rewarded for their savings over time with increased purchasing power of their money? Obviously, the exact opposite is taking place in this world. What’s going on?

A picture is worth a thousand words and the chart above is no different. There is 1,500% more
paper money today than there was in 1970.

Oil Price Since 1960

Hey, where did all this money come from? Doesn’t more money mean more economic progress?

The huge increase in the paper money supply is from borrowing at all levels from consumers, corporations, and government. Every dollar borrowed is a dollar created out of thin air by the banks. The process is legitimized by “the fractional reserve system”, as the bank literally prints dollars in its computer and writes a check to you upon your loan approval.

To answer the second part of the question - there is no positive correlation between the money
supply growth and real economic growth. As we explained, the world can function and advance
with a fixed money stock.

What’s wrong with more money? It stimulates consumer spending, creates more interest-income for savings and promotes higher housing and stock prices. More of everything is a good thing!

To that argument, I say: What if the Fed through its ingenuity and generosity, doubles everyone’s savings account balance? Does that create progress? By the same token, to combat price increases, did Venezuela fix anything fundamentally by issuing a new currency, “Strong Bolivar”, that essentially chops a zero off the old Bolivar? Here are 4 more points to consider:

1. Fairness – Arbitrarily, some are allowed to borrow more than others. Does it make sense for a government to have unlimited borrowing power while it hardly produces anything? And what is so special about a banker in that he can lend to whomever, for however much he wants, with the money that’s not even his?

2. Price Distortion – Since new money is not distributed evenly, the prices of various goods and services increase in a cascading fashion, depending on who gets the money first (like a ripple effect). Think of a lottery winner. He is likely to outbid others for the things he wants, thus causing prices of his desired items to go up first. Let us be clear: The random introduction of new money impairs the role of price as a proper clearing mechanism.

3. Bad store of value – With online banking and credit cards, today’s money is a great medium of exchange. However, the ever-increasing quantity of paper money makes it a terrible store of
value. Remember: Every time someone borrows, new money is brought into existence, diluting the money you and I have meticulously accumulated. Should a retiree rely on the risky stock market to retain his wealth?

4. Moral Hazards – How is it fair that bankers can borrow billions of dollars to spend and invest? And when banks and companies become too indebted but are too big to fail, they are bailed out. How does that serve as an incentive for those who make cars, sew clothes, and plant trees to save?

When unfairness, price distortion, corruption, and loss of true wealth reach the extreme, the result is a loss of confidence in the paper-money system.

I quote John Keynes from 1919:
“There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose. ”

Paul Volker was right when he said in 2000:

“Inflation is related to monetary policy. It’s related to the issue of money. The issue of money is a governmental responsibility predominantly, and to use that authority in a way that leads to inflation is a system that fools a lot of people, and to keep fooling them you have to do it more and more; [that] is a moral issue. I put myself in that camp. “

And Bill Gates said at Davos world economic forum in January 2005:
“I’m short the dollar. The ol’ dollar, it’s gonna go down.
We’re in uncharted territory when the world’s reserve currency has so much outstanding debt. It is a bit scary.”
How do you short the dollar? With ECB printing Euros no slower than the Fed printing dollars, it’s clear that gold is the only refuge of savings. Gold has raced from $428 to $850 today since Bill spoke in 2005. Is it too late to join gold? The right price for gold today is a long topic that’s best be left for another day. However, judging by how oil rocketed from $10 to $100 within the past decade, gold has not nearly reached its potential. We manage a gold fund and have written much about gold and currencies at www.goldmau.com I invite you to read up.

John Lee, CFA
johnlee@goldmau.com
+1.800.965.6404
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