BERAL, INC.
Andrew Racz
Director of Research
300 East 54 Street, Suite 26C
New York, NY 10022
Phone: (212) 319-6949
Fax: (212) 753-1944
E-mail: mlikar@aol.com

The Gathering Storm

April 9, 2013

If the price of gold would fall to $1,000 per ounce people would still take vacations in Paris. Also, many people from Shanghai would still cover to New York City.

If gold price increased to $2,000 per ounce, the U.S. government would still continue to borrow money. We live in the digital age.

We are using gold as a major currency.

The digital age has to manage both money and gold. The digital age demands mining executives who understand both gold mining and the utilization of gold as a tool to manage the gold mining assets.

Undoubtedly, gold mining requires a vast amount of money . Sophisticated techniques have already been born. The understanding of monetary values and the planning of successful mining complexes will have to bring in new executives who are equally at home in running gold mines and managing money.

In the year 2013 the need of such individuals exists. Granted few of such people are household names.

However, the digital age is calling for new leadership.

Whatever happens to the price of gold we will always need gold.

About 10 years ago Robert McEwen, a leading factor in the so-called “ gold circles”, well known as a gold expert and theoretician, predicted that the price of gold will go up from $285 to $2,000 in about 10 years. Gold did reach, $1,800 in 2012 and the popularity and value of gold and gold related assets have gone up meaningfully.

The most colorful project was the Ivanhoe-owned Mongolian gold project which is jointly owned with the Mongolian government and Rio Tinto. The prediction that in 3 or 4 years 650,000 ounces of gold will be mined became a popular subject on the front pages of the financial news. The future of Mongolia reached the front pages. A particular event I remember when the author of gloom and doom, Marc Farber, talked about gold in the Sunday news, the commentator said “we reached Mr. Farber in of all places, Mongolia. The interview was in 2010 and it did reassure the world that gold is going to go up because along as President Obama and the Secretary Tim Geithner are in Washington, we don’t have to worry about gold. He made the famous remark, “Obama is the best friend of gold”.

The popularity of ETFs picked up two or three gold-related ETFs on the front pages and the size which we reproduced has been staggering. It seemed as though the world of finance will incorporate gold in bigger volume every day. In 2010, 2011 there were at least 10,000 exploration types of gold in Australia, Canada and Africa. They were actively traded and what is important for those companies and the stockholders and the brokers and the investment bankers was that money was cheap; the gold companies, the promising gold companies, and exploration type of gold companies always could raise money. They raised money by a simple formula. Let’s say the junior company 10 million shares; they sold 2 million at market related prices which could be let’s say $1 and attached half of the 2 million or a million warrants at $1.25 as an incentive to market the product.

Later on it was admitted that investment bankers, public relations officers, accountants and bankers, have made infinitely more money than the juniors.

It was an industry; an industry which many people felt – many corporate executives of the juniors felt will never end.

The small juniors all hired investor relations and paid out large sums for their so-called expertise. In my opinion these were unaccomplished sales people and a shame in the world of finance. Investor relations professionals were not educated in best schools, they were not educated in finance . They were not mining engineers or connected to financial institutions at high levels. Their expertise lay in talking about a company, inflating its future and stability in a broad manner They had no real knowledge of the mining industry, of gold, of monetary values, and as a result whomever they talked to and they talked to the public making them believe that the good old days like the American stock market in the 1920s was going to stay forever. The Investor relations’ empty cheerleading accomplished nothing and the stocks of the juniors continued to fall.

Anybody who studied the last 100 years in finance remembers the interview with the Chairman of General Motors in 1929 when he said, “what’s good for General Motors is good for the country”. And then when he was questioned further, he stated “everybody ought to be rich”.

Well the investors relations people told everybody who called in about any of these junior companies, things are good; they will only be better, the reserves are solid. Finances are strong and in our company, if you are a stockholder, you ought to be rich.

And then the carousel stopped. It slowed down in 2011 and slowed further in 2012. First at $1,800 gold stopped going up. George Soros sold all his substantial holdings in the prime gold ETF. The juniors stocks started to fall slipping lower on a day to day basis.

The value of gold, at least in theory but probably in practice, did not decline. Many knowledgeable people who believed in the Gold Standard, who believed in Lou Lehrman’s analysis that the enormous debt of the United States which is $17 trillion, should be converted into gold, and the only way we can convert into gold is if we monetize gold underground. This would increase the value on a 5 to 1 basis as there is 5 times more gold underneath the ground than on the surface, and at least we have a fighting chance to monetize gold and back our tremendous national debt.

At the same time, the theories of Lou Lehrman are not matched by the performance of the gold mining companies. Certain mergers like Keegan-PMI fell apart. The stockholders didn’t want to finance the merger with internal cash. They were afraid that once the internal cash is used, that there will be no other cash available for the future.

Major companies had multibillion dollar write-offs like Kinross and Barick simply because the valuations dropped sharply. These companies had difficulty afterwards to raise money. A medium sized company, Chesapeake Gold, dropped 20% again because of valuation and major financing has been called off.

In the resulting atmosphere there were bloodbaths among the Canadian brokerage firms. The firms fired people and sharply reduced the number of underwritings, secondary offerings, private placements, which were prevalent two years before.

In April 2013 all financing activity stopped.

In this atmosphere, a new idea came out which I call Gold Index Bonds. I presented this idea on numerous occasions and have written about it, as a matter of fact, in 1982 it was shown to President Nixon. Prior to that I worked with Bunker Hunt and eventually the IMF asked for my advice on gold for European central banks.

Actually, in 2011, and 20012 Mr.Meredith, the vice chairman of Ivanhoe asked me to prepare a detailed analysis of gold index bonds which he welcomed. The requirement was $2 Billion, but it was not implemented because for political reasons, Ivanhoe sold out its position in Mongolia.

I have modernized the concept of Gold Index Bonds for the digital age. The idea of being that as a $1,000 bond you have a number of options to buy gold below the market, several years from the day of offering. This would enable the company to present a paper that for $1,000 bond, they will give option value at current prices – 20, 30, 40% above the nominal value.

I also improved the situation saying that if sufficient number of units – thousands of units are marketed – and if you create a $10 paper out of $1,000 and list the $10 paper on a recognized stock exchange, we create an equity that could actually have a very sharp increasing value if the price of gold goes from the current depressed level of $1,550 to a higher value.

My idea was to make gold index financing attractive, create a new security and at the same time enable the juniors and other gold companies to get money.

The fact remains today that most gold companies cannot raise money. And if they do raise money, it would be depress the current price, it would be what’s called almost a depressive market situation and even if it can be done today, it would eliminate the possibility of a second or third financing as the dilution would be prohibitive.

Gold index bonds are not prohibitively expensive; on the contrary, they create an interest in the company and if the price of gold recovers, the interest through the so-called $10 unit could increase the interest in the parent company. This interest can increase because it has speculative value immediately and at the same time, enables the owner of the company to believe that it still can avail itself of a second and third financing opportunity and therefore the company’s financial structure will not only improve but it can still have the option to continue to raise money.

After all, what is a financing? A financing delivers cash to a company and increases the value of the stock for the future.

I sincerely feel that my formula achieves exactly this whereas at the same time in the current circumstances of forcing a company to use internal cash flow for its daily needs or alternatively using secondary financing structures which requires borrowing money at prohibitively high rates are not conducive for the future. These old fashioned ideas merely serve to depress stock prices.

Where are we heading now? We are heading as usual to the future. But the future of gold index financing and the future of the gold industry is bright. It is just needs some reorganization. It is just that we have to learn from history and adopt a futuristic positive outlook.

If we give in to depression; if we give in to all techniques – let us now think for a minute of the title of this report …. The Gathering Storm.

The 1930s – that Churchill predicted that unless we stand up to Hitler, our life is going to suffer and it will take a generation to recover from the depressive thoughts.

The world did not take Churchill, the world did not take the realities seriously.

The famous attorney, Johnny Cochran who defended the California-based O.J. Simpson in court, did refer to the attitude of not looking and fighting for the future, but giving in to an unnecessary negative posture.

He stated that when a housepainter in 1924 started to march in the streets of Munich and we didn’t take him seriously, then he reached Berlin and we didn’t take him seriously. He became Chancellor of Germany and we didn’t take him seriously. Then eventually 100 million people died and Europe was destroyed and then it was too late.

In my lifetime, all this has come through. In my lifetime, I always believed that mankind can go forward so long as we are creative and so long as we believe that the future is in our hands.

The dollar did lead the world beginning the Second World War; since 1971, when President Nixon changed the monetary system, gold was achieving greater value on a yearly basis.

In 2001 America started and the world followed a deficit financing of unprecedented proportions.

Today, we have to begin the healing process. We have to mobilize what we have to solve international debt. We don’t want $17 trillion debt in America. We don’t want to become another Spain or Italy; we don’t want to become Cyprus.

We have to introduce modern thinking to absorb the debt and the debt and the solution maybe gold index bonds and gold index financing.

If the price of gold would fall to $1,000 per ounce people would still take vacations in Paris. Also, many people from Shanghai would still cover to New York City.

If gold price increased to $2,000 per ounce, the U.S. government would still continue to borrow money. We live in the digital age .
We are using gold as a major currency.

The digital age has to manage both money and gold. The digital age demands mining executives who understand both gold mining and the utilization of gold as a tool to manage the gold mining assets.

Undoubtedly, gold mining requires a vast amount of money . Sophisticated techniques have already been born. The understanding of monetary values and the planning of successful mining complexes will have to bring in new executives who are equally at home in running gold mines and managing money.

In the year 2013 the need of such individuals exists. Granted few of such people are household names.

However, the digital age is calling for new leadership.

Whatever happens to the price of gold we will always need gold.

Disclaimer

Information contained herein is based on data obtained from recognized statistical services, issuers reports or communications or other sources believed to be reliable. However, such information has not been verified by us and we do not make any representation to its accuracy or completeness. Any statement non-factual in nature constitutes only current opinions which are subject to change. BERAL INC. or their officers, directors, analysts or employees may have positions in the securities or commodities referred to herein, and may as principal or agent buy and sell such securities or commodities. An employee, analyst, officer or a director of BERAL INC. may serve as a director for companies mentioned in this report. Neither the information nor any comment expressed shall constitute an offer to sell or a solicitation of an offer to buy any securities or commodities mentioned herein. There may be instances when fundamental, technical and competitive opinions may not be in concert. This firm may from time to time perform investment banking or other services for or which investment banking or other businesses from any company mentioned in this report.

 

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Andrew Racz. 300 East 54 Street, Suite 26C, New York, NY 10022
Phone: (212) 319-6949 Fax: (212) 753-1944. E-mail: mlikar@aol.com

Copyright © 2011 Andrew Racz. All Rights Reserved.

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