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

... from Casablanca to Monte Carlo

November 20, 2009

November, 2009

American billionaire, John Paulson,

with $30 billion

is betting on gold.

China, with $2 billion, plus $500 billion yearly surplus income

has

discovered gold.

It all started in Casablanca.

The year was 1943.

When President Roosevelt and Prime Minister Churchill met in Casablanca in January, 1943, the President received a letter from Generalissimo Chiang Kai-Shek and Madam Chiang Kai-Shek that they wanted to attend the conference to address Chinese problems. It was less than a hundred years ago, but it's true. Actually, Prime Minister Churchill objected to the presence of Madam Chiang Kai-Shek because, as he said, she was a woman.

Some seventy years later, the Chinese were a modern country. They are not at war with anybody. They had over two trillion dollars in monetary reserves, of which $800 million was in U.S. dollars. However, the Chinese didn't have much gold. Only in 2008 did they acquire altogether 1,100 tons, which was much less than the 8,500 tons of gold held by the U.S. Treasury. Furthermore, the Chinese gold mining companies were relatively small. Their total production was less than 10 million ounces a year.

China in the last twenty-five years developed capitalism. They called their country Communist, but much to their credit they didn't have any of the stupidities, short-sightedness and unintellectual attributes of a socialist government. They were infinitely more capitalist than France under Mitterrand and the United States under President Carter.

The world has substantially changed since 1943. Although China split into three parts, their combined population of 1.3 billion people, as the country became industrialized, required a tremendous amount of commodities from iron ore, aluminum, steel, coal. The largest cost was the oil bill. The Chinese had to utilize their monetary reserves skillfully and one of the key thoughts the Politburo exhibited was to respect gold for the very same reason that gold was growing in value, therefore as a monetary reserve it had grown in value. A country which is buying oil, steel and coal overseas has to respect not only its stated monetary reserves but its future monetary reserves. Basically speaking, their actual policy in November, 2009 was opposite to logic. They were putting the money into dollars, which was declining in value, and they were not buying gold, which was increasing in value. The Chinese policy in reverse was exactly the reverse of the interests of the United States and the world was watching when and how a major confrontation is going to develop.

Gold is basically held by governments, banks, and major mines. A major mine has reserve, Newmont Mining with 85 million ounces of gold, and a 7 million daily production. It was an attractive package. The Chinese obviously couldn't buy a country. They could trade on the open market, but the actual size of gold is deposited in major mining companies whose ownership represents a similar if not greater value than gold in the treasury. Very simply, the reserve can grow in value.

In April, 2010, an American businessman, Robert Friedland, delivered a speech in the Bay Street Theare in Sag Harbor, Long Island. He knew at that time that Ivanhoe, of which he was head, in which he owned the largest block of shares, over 100 million, has made history. History was the rapid events in the six months of the time period between October, 2009 and April of 2010, which began when Ivanhoe made peace with the Mongolian government and signed the so-called investment agreement which calls for Mongolia to own 34 percent of all the assets and eliminate the so-called excess profit tax.

The events overtook Ivanhoe and overtook in a way Mr. Friedland, except that the board of Ivanhoe acted with remarkable rapidity and astuteness during this period. The price of gold in October was less than a thousand ounces. It began a rapid development and by the end of November, 2009, the price hit $1,200 and by April, 2010, the price for an ounce of gold was above $1,500 on the open market. This event was the beginning of a rapid rise of a company that has made history.

First, Rio Tinto exercised its first set of options and acquired 20 percent of Ivanhoe, with the injection of $500 million. This would follow a negotiation for Ivanhoe to invest, which was their right, another $1.2 billion to go up in percentage terms to 43 percent of Ivanhoe. As the price of gold was rising and the value of Ivanhoe increased, new parties from the Middle East, from China particularly, appeared on the scene to put up to one billion dollars into Ivanhoe. 

The interesting thing is that in October, 2009, the price of Ivanhoe was $9.00. At the end of November, it was $13 and the bidders appeared at a price of $20. Thus, Ivanhoe was scheduled as a possibility to go from hardly any cash assets in September, 2009 to $2.5-3 billion by April, 2010. Furthermore, as the price of gold hit $1,500, bidders for Ivanhoe at $20 would make the total sum invested in this company $4 billion.

I may be forgiven for saying that Mongolia is not a totally visible country. Undoubtedly the publicity of Russia buying the uranium reserves of Mongolia and China the coal reserves, and the size of the country and the size of the deposit did give Mongolia somewhat of a Hollywood image. But in many respects, the reserves of any commodity in Mongolia, the largest cannot be compared in importance and security with the same commodity in the Western world.

I have stated before that China recognized that it needed gold. Again, their $800 billion U.S. Treasury bills two years later may be only worth $700 billion. But $800 billion invested in gold could be worth $2 trillion.

In the middle of November, 2009, there have been rumors that the Chinese want to buy Newmont Mining, the second largest gold mining company in the U.S. It has also been stated that the Chinese will buy up the so-called IMF sales of 300 tons, after the Indians picked up 200 tons, and may acquire other gold reserves. The reaction in the world is due to the recognition that a country with a large surplus better keep its money in so-called hard currencies than in soft. But what are the hard currencies? 

Ten years ago the world started to realize that people could diversify from dollars to euros and can acquire some gold, and the combined diversification of euros and gold gives the opportunity to abandon the dollar. If this is what is happening, gold is becoming the reserve currency. And even so, it represents less than 8 percent of the total value of reserve currencies in the world. At the price of $1,000, it could represent 16-20 percent in a few years' time. A new currency can be born based on gold and new papers can be printed tied to gold. To some extent, China delivered the final blow to the dollar. In Casablanca, the world had a dollar shortage. In 1943, not more than a billion people worked. As the Second World War ended and the reconstruction of the world has taken place, the industrial activity everywhere in the world has eaten up the surplus dollars and, in fact, various countries were tendering their dollars back to the U.S. for gold.

The second major change was when President Nixon on August 15, 1971 stopped the convertibility of gold and created floating currencies.

The third is a historical event which we cannot reproduce. We do not know who made the decision of when it was made, who advised the Chinese government to point out that to own soft currencies declining in value is not in the best interests of China, but there exists or there may exist another potential currency, namely gold, that may retain its buying power.

Why Ivanhoe?  Ivanhoe was created in the 21st century. A major international gold company, which today consists of Mongolian gold, copper and gold. In the process of being an important company with reserves that are beyond comprehension.

Is Ivanhoe becoming a gold company or an international mining company? It seems that the reserves, which represent 66 percent of the total in Mongolia, that produces at least $750 million worth of gold at a $2,000 gold price for 35 years, it attracts $3-4 billion, can through various channels, subsidiaries, acquisitions, become a major international mining company.

The interesting feature is that Fred Oppenheim and Sir Cecil Rhoades, when they created Anglo American, had no idea that they would diversify to London and the United States and become a financial conglomerate that Harvard Business School would have to spend a month describing and explaining, even today.

The world has very rarely seen, and we took a hundred years, to have the seeds of a new company, North American based, huge initial cash flow, and an opportunity to diversify into Mr. Oppenheimer's successor. I am one of those lucky people who met both Harry Oppenheimer, Fred's son, and Robert Friedland. Robert Friedland stands up in Sag Harbor to deliver the summary of the eventful six months, its projected deliveries in gold and copper, its current cash, its plan, which obviously even today he doesn't know, when Mr. Friedland delivers a talk it will be the reflection of a 21st century businessman of the possibilities of mankind. 

One thing he would know, and he may talk about it, is that he knew he made history. In 1972, when President Nixon visited China, Dr. Kissinger said in an interview on leaving that he knew that the United States made history. Before 1943, and many years afterwards, China was a totally poor, almost starving nation. Numbers they had, people they had. The first time China was accepted in an international conference was Casablanca, and thirty years later in China there were seven meetings between President Nixon, Dr. Kissinger, and Prime Minister Chou En-Lai.

The world in the 21st century will never be the same as before. The Chinese people will never people as unimportant as they were in Casablanca. The Chinese people will never have the opportunity they had in 1972 when they made peace with the United States. And in 2010, the North American based Ivanhoe may represent an expansion of an international mining company which may reach its power all over the world.

I sincerely hope that Mr. Friedland will remember Casablanca.

The inauguration of the currency created Ivanhoe can appropriately be presented in the Sag Harbor Theatre. After all, the Hamptons is becoming the American version of Monte Carlo, and providing sunshine to the world. A hundred years ago, there were the Oppenheimer's to create Johannesburg.

In 2010, Ivanhoe came to the Hamptons. Ivanhoe by then had become one of the world's ten international mining concerns. In 2010, the Chinese will be the second largest owner of gold.

. . . from Casablanca to Monte Carlo.

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.

Disclaimer