28 May 2009

The bullish bullionaire ~ Repost

PORTFOLIO POINT: Four decades of prospecting for and investing in gold have made Mark Creasy seriously wealthy. And he’s never been stronger on the yellow metal.

If anyone in Australia deserves the title of “Mr Gold” it is Mark Creasy, a prospector for 40 years and, more importantly, someone who knows the value of gold as an investment and as a hedge against economic uncertainty.

Famous for slipping under the guard of the Australian Taxation Office in a 1991 deal that netted him a tax-free $120 million, thanks to a Depression-era tax break awarded to prospectors selling mineral claims, Creasy is much more than a man armed with a pick, a shovel and a copy of Tax Act.

A graduate in mining engineering from London’s Royal School of Mines, Creasy is a deep-thinker on the subject of gold and its historic role as the ultimate form of money.

When Eureka Report popped into his West Perth office, it didn’t take him long for the conversation to drift to the subject of historic economic crises and how gold has held its position as the value of other assets has crashed, or been destroyed by inflation.

With the world facing its greatest financial challenge since the 1930s, Creasy’s theme of making gold part of all investment portfolios carries added strength.

Ranked last year by BRW magazine ranked as Australia’s 143rd richest person with a fortune estimated at $284 million, Creasy has put much of his money where his mouth is with an extensive share portfolio that includes large holdings in small to medium mining stocks.

Included among his holdings, which can change quickly, are Lihir Gold, OceanaGold, Apex Minerals, Dominion Mining and Medusa Mining. A search of ASIC records two years ago showed that Creasy and his main investment vehicle, Yandal Investments, appeared on the share registers of 44 listed mining companies.

Over the past decade Creasy’s faith in gold has been well rewarded. Since 2001, gold has been one of the world’s most stable investments, opening higher every year.

London Bullion Market records show gold started 2001 at $US272.80 an ounce, and then progressed year-by-year, to an opening price of $US278.10 in 2002, $US342.20 in 2003, $US415.25 in 2004, $US427.75 in 2005, $US520.75 in 2006, $US640.75 in 2007, $US846.75 in 2008, and this year opening at $US869.75.

Price fluctuations during those years, including a three-day peak above $US1000 an ounce in 2008, have made some investors wary of gold, but in terms of a consistent rising trend no other investment class can claim a decade of improvement, and none has held its ground as firmly during the global financial crisis.

As an investment, gold has two primary attractions: it offers stability during time of economic uncertainty; and it is an asset beyond the reach of government, and the inflationary effects of excessive printing of paper (fiat) money.

The major detractions are that gold, when held as metal, does not generate a financial return, and during periods of economic stability that lack of a dividend sees it fade in popularity.

Gold plays its best role as an anchor in an investment portfolio, and as an asset for troubled times.

This is how Mark Creasy sees gold.

The interview

Tim Treadgold: Why have you concentrated so heavily on gold prospecting?

Mark Creasy: Well, I believe the rate at which money has been created by governments in response to the global financial crisis is highly inflationary. We have a bias in the economy towards inflation. We don’t really live in a democracy. We live in a system of auction politics with more people relying on government handouts than who don’t rely on government.

Can you can see parallels between the 1970s and today’s economy?

I’ve believed for some time that we’re going to have a repeat of the 1970s when we saw a dramatic outbreak of inflation. This time, however, I believe the action of government is far more intrusive and far greater. I’m not 100% sure that we’ll have the same result, but we have sown the seeds of a major inflationary outbreak.

And inflation is a trigger for a rush into gold?

What happened in the 1970s is that the Bretton-Woods agreement ended in 1971 and the Americans stopped guaranteeing to exchange their dollars for gold. The price of gold rose strongly … peaked in 1975 at $US196 an ounce. It then collapsed, with the real boom starting in 1977 and rushing up to $US840.

And the driver for that eight-fold rise in the gold price over a few years was inflation?

Correct. It was driven by inflation which was, in turn, driven by the economic policies of the Western world, and the second oil crisis when the price of oil soared.

Looking at today’s financial world, is wholesale printing of paper money, or quantitative easing as it’s called, adding to your belief in gold?

I don’t think the world has ever seen a worse situation. The reaction of government to the 1970s crisis was to splatter money all over the place. This time around, you can add a nought to the number.

One of the problems for gold is that tough times always brings a flood of scrap gold on to the market, counteracting the price rise. Why won’t that happen again?

Scrap gold, and even mine-supply, aren’t really the big players in the (gold) market. There’s about 160,000 tonnes of gold in existence, and the world produces about 2000 tonnes of freshly-mined gold a year, and about 1000 tonnes is generated as scrap. The total amount of mined gold and scrap is less than 1% of the overall gold market. The mine supply isn’t all that important in the gold price. It’s all about sentiment. The people who will influence the value of that 160,000 tonnes are the biggest shareholders, and they are the central banks, which own about 30,000 tonnes.

Gold is a bit like a company which has a dominant shareholder. If everyone believes the dominant shareholder is selling the price drops like you wouldn’t believe. A major influence is how people see the biggest shareholders handling their gold.

And recently we’ve seen the Chinese central bank buying gold.

Correct. The best way is look at gold is not on the peripheral, say the scrap market or even mine supply; it’s to ask what are the big shareholders doing. In the past we’ve seen big holders such as the Bank of England and the Swiss National Bank selling, and people think we’re out of this. When they see a big new buyer, people want in.

Is part of what we’re seeing a result of countries such as China losing faith in the US dollar?

It seems to me the difference between this decade and the 1970s is that back then we had a very large part of the world uninvolved. We had the communist world. South America was closed off. Africa and India were not included. Today, virtually the whole world has joined in, with one of the big unknowns being what China does with its $US2 trillion in US assets. It is a very delicate situation.

Surely the problem is also one for the Chinese because they can’t sell or they crystallise a huge loss?

Whichever way you look at it it’s very delicate and badly handled; it’s going to have repercussions. If it happens it will certainly be good for gold.

Your outlook for the gold price seems to be that we’re likely to see a flat period, like the mid-1970s, before an upward surge?

If we play out like the 1970s we are going to have a flat period. Right now people seem to believe that the stockmarket crash is over and we’re on the recovery track.

And you don’t believe that?

I’m not sure. All I know is that if we are on the recovery track the price of gold is definitely going to go down. We had an apparent recovery in 1976, and everything looked OK for about a year. Then along came the second oil shock, and along came massive inflation. That’s when people realised it hadn’t been sorted and that’s when the gold price went berserk.

So the key to watching the gold market is to watch for signs of an outbreak of inflation?

Yes that’s right, though I haven’t seen those signs yet.

What are the best ways to gain exposure to gold?

It’s a question of risk profile. If you’re a person with a high risk profile you would buy explorers. Drop it down a notch and you would buy junior producers. Down another notch and you would buy a major gold producer. Drop it right down to the bottom and you would buy physical gold.


No comments: