Safe Haven | Gold: Hyperinflation: Millions, Billions, Trillions And Then...

$16 for a loaf of bread? Money carried in wheelbarrows? Hyperinflation, an event from the past?

Most investors today are now familiar with the lessons of the Great Depression. But few are so sanguine about the lessons of the 20s and the Weimar Republic's hyperinflation. History is full of examples of countries that failed to pay their debts, opting instead for hyperinflation to pay their bills. Inflation simply reduces the value of debt, hurting creditors and postpone the inevitable adjustment. History also shows that deficit spending and printing money is so addictive and politically expedient that governments rarely manage to reverse the downward spiral. Hyperinflation is a greater evil that wipes out savings and destroys more economies than depressions. Right now, hyperinflation is a greater risk than the 1930's style depression that so many fear.

In the last century there were over 25 episodes of hyperinflation with most occurring in the half century. While many know of the Weimar Republic hyperinflation, few recall the French hyperinflation in the 1800s, nor of China's from 1935 to 1949. Ukraine faced hyperinflation in 1994. And fast forward today, Zimbabwe is still experiencing hyperinflation.

In the last two decades, inflation was like the five cent cigar. The lack of inflation has allowed America's politicians to spend more, promise more and the consequences have resulted in a series of bubbles. Easy money allowed homebuyers to buy homes they could ill afford leading to an inflation in property prices and of course the inevitable bust. But few people remember that America has experienced double digit inflation in 1910s, 1920s, 1940s, 1970s and even in the early 80s. It seems like only yesterday that we were on the verge of a collapse of the world's financial system. A year on the steep rally that started in March has been fed by the identical recipe of cheap money and big doses of government spending that spawned previous bubbles.

The good news is that Washington, contained the meltdown through government support and bailing out Wall Street. The bad news is that the record amount of debt will cause yet another and deeper wave of financial crisis. The really bad news is that America's creditors are running out of patience, and the unprecedented monetary easing and fiscal expansion will push down the dollar causing a bigger decline and hyper-asset inflation. Having just emerged from an economic trauma caused by excessive spending and debt, what we don't need now is more spending and debt.

While largely a twentieth century phenomenon, in every decade we have experienced hyperinflation. A study of some 20 hyperinflation episodes reveals that most lasted about five years and all were preceded by up to a decade of excess government spending such as today. And in all hyperinflations there was a common ingredient of loose spend and the excessive printing of money by these heavily indebted countries.

One thing is now clear. When governments spend more than they bring in, monetize their debts with increased supplies of fiat currency to fill the gap, great countries can go insolvent. Weimer Germany became the world's largest debtor facing huge war reparations that exceeded its GDP and could not pay their bills so took to printing money that ended in hyperinflation. France's eighteen century collapse was caused by printing so many assignats that businesses closed and it took over forty years for a full recovery. In Zimbabwe today, Robert Mugabe expropriated land, printed dollars and the economy came to a halt, revived only when they used outside currencies. Or there is Argentina which monetized its deficits and is going through a second bout of hyperinflation. And then there was China's near bankruptcy caused by Chiang Kai-Shek's numerous wars with Japan and the Communists which caused his government to takeover the banking system in order to fund its deficits with printed yuans that ended in hyperinflation and the collapse of his government.

The major cause of hyperinflation is a massive increase in the supply of paper money to finance a sovereign government debt, usually over 100 percent of GDP. One far reaching consequence of the global financial meltdown is that debt made a bad slump worse, particularly those with high debt to GDP ratios. We believe that despite the green shoots of recovery, the United States is running up such an enormous national debt as a percentage of GDP that they risk eventual default. Indeed, a look at America's monetary base shows it has exploded at an unprecedented 110 percent flooding the financial system with money.

Another obvious parallel, is that the hyperinflation countries in the past often abandoned a tangible backing such as gold or silver in favour of printing a fiat currency. Many even created financial instruments as substitutes for money. For example in the French experience, land for a time backed the assignat in the modern day equivalent of a mortgage backed security. Without the need of a monetary discipline like gold or silver to back money, governments find it too tempting to resort to the printing press to pay their bills. After all, money is a form of a government liability so a paper currency without an implicit backing other than a state based faith, is dependent upon public confidence.

Milton Friedman once said, "Inflation is always and everywhere a monetary phenomenon". Inflation enabled governments in the past to reduce or avoid repayment of their debt burdens. Inflation also makes certain assets worth more and today we have a healthy dose of hyper-asset inflation. When too much money chases too few goods it creates pricing pressures. Stock markets and tangible assets are up. Price inflation is next.

We believe a look at the crises of the past gives us a better understanding of the present and the future. Today there are too many similarities with past hyperinflations from the usage of the Fed's quantitative easing methods to pay for deficits caused by wars and excess spending, to the mobilization of the banking system as surrogates of the central bank, to the Fed's mark up of Wall Street's toxic assets to pay off loans. The US is not the first country to resort to the printing presses but the sad truth today is that no one, including "Helicopter Ben" is talking about how to fill the gaping hole in the federal budget. History shows that hyperinflation is often the obvious solution, choice and consequence.

Before World War I, Germany was a prosperous country with a gold-backed currency. Germany abandoned the gold backing in 1914 to finance the war with some 160 billion marks. The dollar then was worth 4.20 marks. After WW1, Germany became the biggest debtor in the world facing huge war reparations primarily to the Americans who had become the creditor to the world. Today, the roles are reversed with America, the biggest debtor while China now plays the role America played then. Germany's debt to GDP was over 100 percent. In order to pay for the war reparations under the Treaty of Versailles, the German government borrowed heavily issuing more and more paper. By December 1922, the mark fell to 8,000 marks per dollar. Postage stamps even had a face value of 1 billion marks, and by November 1923, the dollar was worth 4.2 trillion marks as monthly inflation ran at 322 per cent.

So much money was issued that over 130 companies were commissioned to print banknotes, not dissimilar to California who recently was forced to issue IOUs to honour its debts. Tangible or hard assets like diamonds or art were hoarded instead of worthless paper. Corruption flourished. Price controls were ineffective. The German people soon lost all confidence in their money. Pianos were bought by non-musical families. Tellingly, the great German industrial businesses like Krupp, Thyssen and Stinnes survived and prospered calling for a lower mark so that German goods would be cheap and help out exports. Industrialists with taxable assets did exceptionally well as did farmers who owned productive land and crops. Between 1919 and 1920, stocks went up 95 percent. Savers were the big losers. To collect its debts, the French occupied the Ruhr. Debtors became winners. Inflation then was seen to be good. In late 1923, hyperinflation was exhausted as monetary reform created the Rentenmark backed by real estate and bonds with a certain value of gold but this time, fixed in quantity. Late in November 1923, Adolf Hitler arrived on the scene with the Munich beer hall Putsch.

In his book, "Fiat Money Inflation in France", Andrew Dickenson White describes how the French in April 1790, issued 400 million "livres" in paper money called assignats secured by the confiscated lands of the French Church during the Revolution. These early mortgage-backed securities or assignats bore interest at 3 percent and were secured by the aforementioned land. Mirabeau their brilliant leader and a great orator of the National Assembly with Obama-like enthusiasm argued that the issuance of assignats was "a loan to an armed robber" and, "that infamous word, paper money ought to be banished from our language." But in September of that year, the government had spent the available funds. Mirabeau reversed course and called instead for the issuance of even more assignats to cover the growing national debt of some 2.4 billion, declaring that the issuance of more assignats would get government lands into the hands of the people instead of the old privileged classes. The public however hoarded that cash and money didn't reach the real economy. Of course that did not last too long as some citizens actually asked for the underlying lands instead of the paper assignats. By the end of 1791, the purchasing power of the assignat declined to the point that businesses closed and in their place came a speculating class. Mirabeau himself, was found to have secretly received bribes.

Also, around that time a new debtor class was created with expropriated church lands and an early shadow banking system was created from this new land-based debt allowing for the issuance of more money. The government lands were even revalued upwards. By December 1791, billions of assignats were issued. The merchant class at first benefited as higher prices made the inventory on their shelves more valuable. Inflation was seen to be good or so they thought. Corruption flourished. White noted that businessmen became gamblers, politicians became businessmen and in the city centers came the quick growth of stock jobbers and Bernie Madoff-type pyramid schemes. The government even declared a new tax on married men on incomes of 10,000 francs and upon all unmarried men of 6,000 francs. The rich soon fled, hid their wealth and only a portion of the tax was actually raised. The government then responded by confiscating the lands from those who had left the country enabling the government to issue more paper. Andrew White describes that the market price for bread was equivalent to $16 per loaf, but later, could not be bought for paper money at any price. By 1795, over 40 billion assignats were issued.

While France's fiat money inflation lasted for nearly ten years, it required another 40 years to bring about a full recovery. Napoleon Bonaparte took over the bankrupt government and its immense debt. At his first cabinet meeting, Napoleon declared that he would be pay cash or pay nothing. In 1797, Napoleon wrote , "While I live I will never resort to redeemable paper". He never did, and Bonaparte confiscated all the gold and France was forced to live within its means. Andrew White's essay on Fiat Money and Inflation was first published in 1876 and again in 1918.

China's hyperinflation teaches us about the dangers of a central bank exerting too much control over an independent banking system. Between 1935 and 1949, China experienced hyperinflation as the Nationalist government under Chiang Kai-Shek printed large amounts of paper currency to pay for wars and debts. In the first year, bank loans accounted for 49 percent of the government's revenue. Prior to 1935, China had no central bank but a vibrant privately owned banking system centered largely in Shanghai. The banking system was disciplined by the threat of a run on the bank, which kept it from issuing more liabilities than assets. However, with the arrival of the Nationalist government in 1927, a consolidation of the banks began as the Nationalists needed the banks to help fund its ever bigger deficits. And with parallels to today under no constraints, the banking system soon became an instrument of the government. And like today, the Chinese central bank guaranteed the private banks' bonds, so the banks could issue even more paper. So much money was printed that Chinese currency notes had to be printed in England.

The Chinese government bonds were backed by silver but in 1934, the United States introduced the Silver Purchase Act which caused a run in the price of silver, causing a flight from Chinese bonds. All institutions and individuals who owned silver were ordered to exchange specie for the new currency, not unlike Roosevelt's confiscation of gold. The Nationalists' takeover of silver allowed the government to print currency without a backing, placing the country on a fiat currency system. The newly created Bank of China consequently printed more money, guaranteeing the notes issued by the three largest government banks. Of course the value of China's paper money collapsed. By July 1935, the Nationalist government became the majority shareholder in each private bank, effectively ending private banking. In June 1937, 3.41 yuan was worth $1.00 , but by May 1949, it took 23,280,000 yuan to be worth $1.00. Chiang was forced to leave the country amid the Great Inflation, paving the way for Mao Zedong.

On April 18, 1980 when Zimbabwe was born from Rhodesia, one Zimbabwe dollar was worth US $1.59. Zimbabwe then was rich with mineral wealth and agricultural potential. In the early nineties, Robert Mugabe expropriated land from the white farmers paving the way for one of the world's worst hyperinflations as Mugabe forced the central bank to print money. Inflation reached 624 percent in 2004 and from January 2005 to May 2007, the central bank issued currency at a rate exceeding that of Germany's Reich. Living standards fell by 38 percent and the ten year cumulative inflation rate was nearly 3.8 billion percent. In February 2007, inflation was even declared "illegal". The only expanding entity was the central bank itself as its staff grew by 120 percent. In January of this year, Zimbabwe's central bank launched a $50 billion note which could only buy two loaves of bread worth some US$1.25 on the black market. Today almost 80 percent of Zimbabwe's population is unemployed. The government has abandoned the local currency licensing over 1,000 shops to sell goods in foreign currency like the US dollar and South African rand as a replacement for the local currency. The end may be near as Governor Gono of the Reserve Bank has proposed issuing a gold-linked backed Zimbabwe currency.

Argentina twice experienced hyperinflation, the first starting in 1969. Hyperinflation began again in 1989 and continued until 1990. Like before, the ultimate cause was too much debt and reckless spending such as aid to Cuba and Nicaragua. The monetary base was doubled. Before 1969, the highest denomination was 10,000 peso. When inflation rose about 10 percent monthly, the Austral plan fell apart by mid 1987. Then the government decided to launch another stabilization plan called Australito or little Austral plan. The government increased minimum wages by 75 percent but public spending continued to grow. Taxes were also increased but that was not enough. The printing of money became a priority and in 1990, a second bout of hyperinflation was unleashed. One current peso was worth 10 billion pre 1969 pesos. Money demand collapsed when it became evident that fiscal deficits were being monetized by the central bank. By June 1988, inflation was running at 186 percent monthly. Lacking faith in their currency, Argentina dollarized their economy by linking the peso to the dollar.

Like France's Mirabeau two hundred years earlier, President Obama raised public expectations with his oratorical skills but instead his big government spending, cheap money, and unsustainable fiscal policies has resulted in the United States facing financial ruin not prosperity. Both saw their popularity wilt when public anger over spending increased. And like before, there's disturbing parallels. For example, elite financiers like China's banks, Germany's industrialists or French jobbers in Goldman-like fashion all feasted during the hyperinflations. Those interests prospered and for a time became populist targets.

Today Wall Street is bigger, the healthcare institutions are bigger and there are still three car companies, all at the taxpayer's expense. The taxpayers today, like then, are the biggest losers. And the banking system, like China's faltering system then is still in the throes of failure with overleveraged balance sheets laden with esoteric debt instruments like swaps, cdos and level II assets. Indeed, rather than become guardians of money, central banks led by the Fed have become creators of money. "Out of the box" solutions such as flooding the system with newly printed money and the mobilization of a surrogate banking system is amazingly still not enough.

Another reason for uncertainty in the capital markets is the looming budgetary fight over America's social safety net, including its healthcare program. Healthcare already absorbs 17 percent of America's output. Obama's almost $1 trillion program to give universal healthcare to 40 million uninsured Americans are ambitious, particularly since he wants to put the financing burden on the rich by raising tax rates. Meanwhile, the US government's "cash for clunkers" program was met with such enthusiasm that the program ran out money within the first week. Not so lucky are the taxpayers because the Fed is still guaranteeing Wall Street's indebtedness, as well as financing another $2 billion for the "cash for clunkers" program scheme. Debt fuelled consumption continues.

The depth and breadth of last year's meltdown has led politicians and central bankers to consider how the United States will exit from their unconventional monetary policies. That exit strategy could include letting short term credits run down or by selling longer term assets, or it could simply raise short term interest rates. The grim truth is that the Fed could easily offset this spending but in a political context would prove to be unpopular and political suicide. Indeed, the problem isn't that the cash is not there, it is being hoarded instead by the financial instituion and foreign central banks. The latest figures from the US Department shows that US liabilities to other central banks have rocketed by 31 percent over the 11 months to May but that the maturities are increasingly skewed to the shorter term instruments. The danger in borrowing short to finance its long term liabilities, the funds might not reach the real economy. The big worry is that the world has become less anxious to finance the Americans, particularly with Chinese savings.

We believe the unprecedented scale of monetary easing and debt creation has the potential to consign the US to a similar fate as Weimar Germany or eighteen century French hyperinflation when currencies collapsed to a trillionth of their value. History shows that the printing presses are only one way of making money. Unorthodox monetary policies, including quantitative easing creates money to purchase assets and today is the fodder of hyperinflation in the future. Overseas, the Bank of England's reserves have increased almost 2000 percent and the Fed's balance sheet has similarly jumped to $2 trillion in less than one year as it swapped highly liquid treasuries for Wall Street's toxic mortgage paper.

A year later, America has become the world's largest debtor. The United States has gone deeply into debt, doubling its debt to $52 trillion from $26 trillion in 2000, borrowing almost half of every dollar of spending. The interest bill on the US national debt of $12 trillion alone is about $340 billion. In ten years, the White House forecasts that the deficit will become $20 trillion and the interest bill would be at least $600 billion or more than last year's deficit. Obama's ballooning budgetary deficit is likely to read $1.6 trillion or 13 percent of GDP adding to a national debt already at the highest level since World War II. The pace of debt creation has caused the current $12.1 trillion debt ceiling to be raised three times in the past two years, and a failure to raise the ceiling this time will cause a default by mid-October. Right now America's GDP of about $14 trillion must now support a whopping debt of around 370 percent of GDP. Household debt is currently near a record high of 131 per cent of disposable income due largely to questionable mortgages of which from the fellows at Deutsche AG report that almost half of all US homeowners are most likely to owe more than the properties are worth next year. Still, there is America's weakened financial system that exceeds 120 percent of GDP after receiving hundreds of billions of dollars and is still on government life-support. And it gets worse, by guaranteeing the financial sector's debt and the trillions of obligations the government itself has pushed its overall indebtedness to over 150 percent of GDP or double US economic output. That is unsustainable.

The Oracle of Omaha, Warren Buffet recently issued a warning about the US taking on too much debt. The billionaire investor fears that a devaluation of the dollar and hyperinflation itself is in the offing if the United States does not change. As before, the consequence of a growing debt load has undermined faith in a faith based dollar and the direct purchases of federal debt for the first time in a half century resembles the desperate action by the French or Weimer central banks in their unsuccessful fight to avoid hyperinflation.

Today the United States has become so reliant on the largesse of foreigners that its needs are now larger than all the savings in the Western world. Someday soon, those foreigners will grow cautious about lending to a country with no self-discipline and demand instead higher interest rates to protect them from a depreciating dollar. Or they could, as hinted recently, insist on lending in euros or renminbi, currencies that the American government cannot print.

China has lent huge sums to the United States. It is the world's largest exporter, surpassing Germany's. It is the world's largest maker of cars, surpassing the United States. Its foreign reserves are at $2 trillion, the world's largest. The relationship between the US and China is in large part defined by China's status as the world's largest holder of US treasury bonds. The unprecedented expansion of central bank liabilities, has made China nervous about holding more dollars and China has begun to dump dollars, driving up prices of dollar based hard assets. China is so concerned about America's dollar inflation that it has reduced its treasury holdings to $776 billion from $801 billion in May. China has also bought more gold as a hedge against the debasement of the dollar. Premier Wen Jiabao confirmed that Beijing also intends to use its massive foreign exchange reserves, to invest in strategic overseas assets in a "going out" strategy. The move supports that nation's strategic goal of independence and includes strategic purchases of copper, iron ore and now Canada's oil sands. China's appetite for resources has fuelled a commodity rally, also putting a floor on precious metal prices. China increased its gold reserves by 75 percent to 1,054 tonnes, making China the world's fifth largest holder of gold, just ahead of Switzerland. Noteworthy, that the holding is less than 1.8 percent of reserves and China is likely to purchase gold from the upcoming IMF's 403 tonne gold sale.

History shows that money must be respected and instead of the artificial propping up of bubbles and more rhetoric, needed are savings, capital, and investment as part of any exit strategy. It is far too easy for politicians to give people what they want. After asset inflation, price Inflation will follow. As long as Washington continues to believe in a free lunch of spending to solve their problems, those huge deficits must somehow be financed. And the Fed, faced with little choice, will print more money. Unfortunately it is all too familiar. We should learn from history not repeat it. Today, foreigners are rightly fearful of dollar inflation, which erodes their own reserves. The US dollar has lost status as a store of value and the amount of debt will pull down the value of the dollar against currencies further.

In each episode of hyperinflation, governments went off a gold or silver standard. The United States went off the gold standard in 1971, and in less than ten years, inflation soared causing interest rates to peak at 21.5 percent. Gold prices went from $35 per ounce to $1000 per ounce as the dollar collapsed. We escaped hyperinflation only by a sharp push on the monetary brakes by Federal Reserve Chairman Volcker who drove interest rates up to double digit levels to strangle inflation. In January 22, 2001 George Bush was inaugurated as President of the United States and the price of gold was $265 an ounce. The US then had a budgetary surplus. Today the price of gold broke $1000 an ounce which means the dollar has been devalued in terms of gold by almost 250 percent in less than eight years. The loss of purchasing power is a consequence of America's profligacy funded by cheap credit, wars and various stimulus packages. The invention of derivatives or money substitutes greatly exacerbated America's problems. While the unprecedented bailouts have piled on more debt, the need for more money to be printed is reminiscent of other hyperinflations. Hyperinflation tomorrow? No, hyperinflation now.

The conventional wisdom is that we must avert a repeat of the Great Depression. This is wrong. What we face now, is worse than the Great Depression because the United States, once the strongest country in the world is quickly becoming insolvent as its banking system remains under-capitalised, its savings are depleted and the inevitable consequence of the trillions of money supply growth is hyperinflation. Gold is a good thing to have. Gold is the antidote to our problems and history shows a safer alternative to other assets, particularly amid worries about the greenback's diminished status as a reserve currency. We continue to believe gold will hit $2,000 an ounce within twelve months.

As gold soared through $1,000 an ounce, gold mining shares finally picked up led by the big cap producers, no doubt because of their inherent liquidity. Over the past few years, mining shares have underperformed gold bullion, partly because gold miners could not make a decent return on their mines. But as gold settles above $1,000 an ounce, producers will at long last be able to generate a decent return and in fact fund future projects. In addition, while there continues to be much demand for ETFs, where investors can buy gold at today's spot price, why pay retail, when you can buy wholesale by purchasing gold mines with ounces in the ground valued at $200 per ounce. Since this March 10 the TSX gold index is up 24 percent while gold bullion is up 13 percent. It remains cheaper to buy ounces on Bay Street.

We continue to recommend the mid-cap miners such as Agnico-Eagle, Eldorado and Centerra which possess superior growth profiles in terms of per share production and reserves. Among the junior producers we continue to recommend Aurizon, Allied Nevada, US Gold, and Centamin, an Egyptian producer. Given the move in silver we also like Excellon Resources and MAG Silver. As for near development situations, Detour Gold, Crystallex, Greystar, and Osisko are also potential takeover candidates. As for exploration vehicles, Rubicon, East Asia, Lakeshore Gold/West Timmins, St. Andrews and Claude Resources have drill, plays that warrant attention.

Agnico-Eagle Mines
This Canadian producer continues to be among the leading performers due to its growth profile. The company has a stellar balance sheet and recently increased its credit line to almost $1 billion. Agnico's Quebec-based La Ronde mine continues to provide the bulk of production with nearby Goldex contributing 35,000 ounces in the last quarter. Agnico's two newest mines, Lapa and Kittila in Finland, produced almost 25,000 ounces between them. More importantly, Kittila's teething problems appear to have been sorted out and is expected to be a full contributor to results next year. Agnico will expand Goldex and is bringing on the Pinos Altos mine in Mexico where a new gold discovery was found . In the first quarter, Meadowbank in Nunavut is expected to start up in 2010 and enable Agnico to double its production to 1.2 million ounces by the end of 2010 from 550,000 ounces this year. We like Agnico for the company's strong growth profile, management depth and mines in safe, mine friendly jurisdiction.

Allied Nevada Gold
Allied Nevada filled its coffers completing a $100 million financing, taking advantage of the strong gold price. The newly reopened 100 percent owned Hycroft heap leach mine in Nevada will produce about 80,000 ounces this year but more importantly, the company has enough cash to expand and work on processing the huge sulphide inferred resource. Management is experienced with seventy-five years of experience and the group was responsible for building Kinross. Allied Nevada has reported positive metallurgical test results. Near term, Allied plans to add a crusher and conveyor, improving the heap leach circuit which will expand production. Also the financing will allow Allied to become an owner operated mine eliminating the need for the contract mobile fleet. As such, Allied Nevada could double production and reserves next year and the stock is recommended at this levels.

Aurizon Mines Ltd.
Aurizon reported a good quarter, producing almost 40,000 ounces from Casa Berardi in northwestern Quebec at a cash cost of $433 an ounce. At Casa there are nine rigs active. With over $115 million in cash, the company is in strong financial shape. From an exploration standpoint, the company continues to make progress at Joanna and a prefeasibility update is expected to outline a 2 million ounce plus resource. Exploration continues at Kipawa in the North to follow up uranium showings. Casa Berardi should produce about 150,000 ounces next year, and we continue to recommend purchase. Aurizon has a strong balance sheet, experienced management group and possesses a rising reserve and resource profile.

Barrick Gold Corporation
Barrick surprised the Street by announcing that it will close out its entire hedge book, reversing a much hated strategy that was an albatross around Barrick's neck. These early derivatives performed well for Barrick, when gold was going down. But Barrick tenaciously hung on to this strategy even as gold advanced. Barrick will take a $5.6 billion loss to close out the 9.5 million ounces of gold hedges which were applied against Pascua Lama. Barrick will immediately close out 3 million ounces of fixed price hedges and will fund that with a $4 billion stock issue. Part of the funds will also be used to help close out the 6.5 million ounces of floating price hedges and Barrick has said it might take as long as 12 months to flatten their exposure. The Street met the announcement with enthusiasm and the stock issue was oversold. Barrick's decision was inevitable, since the higher the gold price moved up, the deeper the losses for Barrick. We believe that the impact will have a positive influence on the gold since some of Barrick's counter parties may have expected to receive gold to settle their contracts and not cash. Such a move will cause additional demand on the market to replace the loaned out gold. Nevertheless, we applaud Barrick's move and we continue to believe that the company will be the "go to" producer among the big funds.

Centamin Egypt
Centamin is the world's newest gold producer pouring gold this summer at the massive Sukari Hill project. The Company has boosted the Sukari resource to some 13 million ounces with a 15 year mine life. Sukari is located in the Eastern desert of Egypt. Sukari is an open pit and should produce 200,000 ounces next year. The Company enjoys beneficial tax rates and only has to pay a 3 percent royalty subject to cost recovery. Centamin is an owner/operator and plans to begin underground development in the current quarter. We continue to recommend this overlooked producer with an excellent growth profile, which is one of the world's largest gold deposits found in the past decade.

Detour Gold Corporation
Detour is dressed up and ready to go to the party, released the long awaited prefeasibility for an open pit at Detour Lake in northeastern Ontario. Detour has one of the largest independant projects in Western hemisphere. Proven and probable open pit reserves are pegged at almost 9 million ounces with a wast to ore ratio of 3.8:1 - and a 14.5 year mine life. With estimated capital costs of $844 million, Detour Lake should produce almost 580,000 ounces of gold annually at a cash cost of $400 per ounce. Detour Gold is an ideal takeover candidate for one of the majors looking for a project in a geographically secure area of the world. Of note with the base case using a$775 gold price, the IRR is 20 percent.

Eldorado Gold Corporation
Eldorado is a Canadian based producer with excellent management. Eldorado has put in place a second footprint, acquiring Sino Gold, China's largest public gold producer which complements Eldorado's Tianjianshan ,ome om Cjoma. Sino Gold will add 220,000 ounces of gold production, bringing Eldorado's output to almost 625,000 ounces and growing to 850,000 ounces by 2011 from six mines. Eldorado will have unhedged are proven and probable reserves of almost 13 million ounces. China is one of the last remaining underexplored areas of the world. Many of China's mines are under the control of the government and possess short lives due to the lack of drilling, western technology and in some cases resources. Eldorado's footprint in China together with Sino's management team, gives it not only the largest platform but an enviable position as a consolidator. Meanwhile Eldorado's Turkish Efemcukuru is in an advanced stage development as Eldorado second mine in Turkey, Buy

Kinross Gold Corp.
Kinross has grown through acquisitions which have been successfully digested and offers good gold leverage. Kinross reported a great quarter but lower than expected recoveries at newly expanded Paracatu in Brazil will result in a loss of about 100,000 ounces or so, causing Kinross to lower its guidance to 2.3 million ounces for this year. The lower recoveries are attributable to the ramping up of the hydromet plant but recoveries are expected to pick in the upcoming quarter. The Kupol mine in Russia was a big contributor in Russia with a strong quarter. Indeed, Kinross' Russian assets have been strong contributors and despite the political risk, the Kinross' shares have performed well. Nonetheless should there be a hiccup in Russia, Kinross is vulnerable. At current levels we prefer Eldorado at this time.

Goldcorp Inc.
Goldcorp reported a huge $300 million loss due to non cash foreign exchange losses. However, Goldcorp kept its guidance at 2.2 million ounces unchanged at a cash cost of $365 an ounce. Noteworthy, is that the crown jewel Red Lake Mine in Ontario saw a decline in production in the quarter due to lower than expected grades and tonnage. The Red Lake is sensitive and the loss is disturbing since this is Goldcorp's main mine. Goldcorp continues construction at $1.8 billion Penasquito project in Mexico. Penasquito is Goldcorp's next big project and is expected to be in production next year, although the price tag have been increasing. Goldcorp. spent $1.5 billion to purchase Gold Eagle, Eleonore and now has taken a stake in Osisko. Goldcorp has tied down a pipeline of projects but is only spending modest sums, raising the question whether these projects will ever be in production. Eleonore in Quebec for example will have some $6 million spent this year, but an internal feasibility study won't be delivered until yearend. We believe that Goldcorp shares are a good source of cash at this time and the funds should be switched into more growth-oriented companies such as Agnico-Eagle.

Yamana Gold Inc.
Yamana is suffering digestion problems and lower output from its crown jewel El Penon in Chile was disappointing. However, Yamana benefited from higher copper returns, particularly from Alumbrera, which produced almost 15 million pounds. Yamana should produce about 1 million ounces this year but we are disappointed over the shortfall of El Penon. Yamana is spending about $66 million on exploration hoping to grow its production. Like Goldcorp, Yamana has grown mainly through acquisitions and the Company is in need of a digestion period. In addition, execution at Chapeda, Jacobina and Gualcamyo will be important.

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