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

Gold Coins & The Money Game

October 29, 2008

There are many presidents of public companies today
who look at a hoard of gold coins and say,

My company

              Needs

                          You!

In the last hundred years, there were three major new elements which were introduced in the monetary field by political events.

After the first and the second World War, hyper inflation set in in Europe, posing the most drastic political changes. When Hitler came to power in 1933, the previous six months saw the five largest banks in Germany collapse and prior to that, hyper inflation created major unemployment.

In the Second World War, the United States emerged as the most prominent power in the world and all the prime goods, services, assets were bought for dollars. There was the second major change in the world, the so-called "dollar shortage" which made America the most powerful country in the world. After 1945 we thought that this would be an "American century". It lasted only twenty years because the dollar started to lose its power, and in 1961 when President Kennedy came to power, he had to protect the dollar by bringing in the interest equalization program American citizens could only buy foreign securities and assets if they paid some 12-15 percent premium for the purchases. The decline of the dollar shortage was the result of careless purchases. Commercial and private purchases of foreign assets whereby the dollar shortage became a dollar surplus and the decline of the value was leading to an era that Kennedy tried to reverse.

Secretary of State, the late Governor John B. Connolly, said to the Europeans that, "The dollar is our currency but your headache."

The beginning of the late 1970s, or rather with the beginning of the 1973 Arab war, gold began to surface as an asset that played with people's imagination, occupied a larger and larger part of national assets, fueled a futures market all over the world, but mainly played with people's imagination as the ultimate haven in bad times without any organized interpretation of its value.

The two run-ups in gold, one in 1980 when gold reached $890, and another run-up from $250 to $1,000 in early 2008, was an interesting phenomena but it did not lead to any re-arrangement of currency values and did not make gold an asset that is widely used and widely respected and considered as a currency.

Curiously, in the year 2008, a new phenomenon presented itself. It started modestly. It is progressing modestly. It is progressing in greater and greater number, but its interpretation by the monetary theorists has not yet reached the high political level. I am talking about gold coins. Now, gold coins have been around for decades. There are different kinds, some are standard like the African Eagle, like the Krugerrand. There are silver coins. But something happened in the chaos of this year which should give rise to the thought that a new phenomenon is in progress which may make a major change in the valuation of gold and, in turn, in our monetary system.

About three to six months ago, the purchase of gold coins increased at a phenomenal rate. Mints all over the world couldn't cope with the demand. The demand was ten or fifteen times the normal demand of the previous years. People were willing to pay a premium of $25 to $75. Gold coins were in demand.

As a rule of thumb, gold coins generally amounted to yearly gold demand of 10 percent. If the figures for the last few months are multiplied out to a year, we may find that gold coins amount to 25 percent plus of the total yearly demand for gold.

Furthermore, we are not talking about Western European and American purchases, South American purchases. We are talking about the extra two billion people in India and China who have become middle class in the last decade and who suddenly became very active buyers of gold coins.

Let us now look at the distribution of sources and uses of gold on a yearly basis. The numbers of increased gold coin purchases are here. The reason is that the ordinary people, not the hedge funds, not the industrial users, not the governments, but ordinary people want to put some of their assets, including 401(k)'s into gold. This is not totally unexpected when the securities markets declined at least 40% in every country, and the American public every day hears that AIG, the largest insurance company, is bankrupt, that Lehman is bankrupt. It is not unreasonable that some people who manage to sell a thousand shares of Lehman at $20 or a thousand shares of Bear Stearns at $140 would put some of their money into gold coins. After all, they could do worse.

The picture is very similar. The Chinese market declined 65 percent, the Russian market 70 percent. They are ordinary people. The American people today are going to elect a man, Barack Obama, whose personality is rather unique. Not only is he likely to be elected but he is being supported by women like Congresswoman Nancy Pelosi, by Warren Buffett, by former President Clinton. We are talking about a man who at least in my opinion will usher in a totally new world. He will be a new president because when he looks at the balance sheet of the country where he was elected, he will realize that money has value, his promises for education and medical issues have no backing, and $12 billion a month for Iraq would only be a bad joke. He cannot continue to do it for three more months.

Let us look at the gold market. Gold is stored in bullions, usually in major countries' treasuries, in EFT's and coins. Now, the bullions are usually bought by governments, banks, very wealthy people, and they are bought and sold when held in the custody of a major institution and technically speaking, it's a computer transaction which takes place in large quantities. The EFT is listed on the New York Stock Exchange. People can buy and sell like they used to sell General Motors shares or Lehman shares and it's a very active trading market.

The coin market is different. Most people don't trade coins. Coins are hoarded, and in fact handed over as gifts from generation to generation. And coins are very rarely bought for trading purposes. Furthermore, coins are bought by almost everybody in the world. The buyers of the coins are the three billion grown-ups with some sort of assets who can save at least $1,000 for a Krugerrand.

Over a period of three years, the three billion new capitalists and the old capitalists can accumulate with a modest amount of their liquid assets a sizable volume of coins. This amount of accumulation obviously is likely to raise the price of gold; therefore the investment may turn out to be quite profitable.

The question arises, where do coins fit in to our financial system? We have already agreed it's a very convenient item to store at home, or in a safety deposit box. At the same time, in 2008-2009 a very badly injured financial system is facing the world while lucky people or intelligent people have accumulated a large amount of gold coins, and such gold coins represent the most valuable part of their investment portfolio.

After all, Apple Computer declined 80 points, Google declined 300 points. As far as savings, look at the Krugerrand and ask the question why not buy more gold coins?
There is, however, a new idea which I want to put forward, and that is to use gold in raising money for public companies. A colorful example for this issue is Mike Milken, who created junk bonds. Among his many contributions, some good and some bad, he financed the cable television industry. Mike Milken created something which did not exist which financed something good. I am not altogether endorsing his activities. He had discussions with me about financing companies which were absolute catastrophes, even before he started. But he created something.

That is where a new chapter is opening up. Take a public company. Take a number of stocks worth, let's say, $1,000, put next to them a Krugerrand and you have a $2,000 unit which is more marketable than the $1,000 worth of stock on its own. There are all sorts of configurations. To make the unit more marketable, you can attach a warrant from the company under consideration. You can change the ratios any way you like. But the issue is that we are entering one, two, three years when stock markets are questionable and raising money for stocks is very difficult, but we have an asset which can be put into the general picture of raising money in a fashion where the investors make money and the company can raise cash.

It is never a crime to be imaginative. It is, however, a crime to give in. If gold coins can help to raise money for companies in these difficult times, then the underwriter is doing a good job and the company may send its executives to school to understand the new finance. Quite frankly, if in the last two years any executives or bankers who bought the real estate junk had gone to school to learn sophisticated mortgages. General Motors and the American people would not be in the position they are today.

What is good for America? It is good if we can create sound financing. To paraphrase the statement of the 1920s, What is good for General Motors is good for America.

May I respectfully say that if utilizing gold coins in financing is good for your company, it is good for America.

There are many presidents of public companies today
who look at a hoard of gold coins and say,

My company

              Needs

                          You!

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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