Thinking about placing your strategic capital and partening with gold for your portfolio?

You might want to start by asking why anyone would ever want to buy gold in the first place?

After all, gold doesn't pay you an income, and history says gold only really competes with cash-in-the-bank (provided it's safe) or government bonds (provided they pay) when inflation rises faster than interest rates.

Gold bullion rose eight-fold when inflation overtook interest rates in the late 1970s. It doubled in price when the same thing happened again in 2003-2006.

But gold can't compete with stock-market shares either, not when the economy grows and revenues rise. Gold bullion is the most unproductive of assets, and it will never promise you a stake in future profits.

Gold Bullion Investment: Gold vs. stocks

For that very same reason, however, that also means gold bullion doesn't rely on consumer spending, new business investment or clever accountancy tricks for its value. Gold is simply a rare, precious asset that people across the world have used as a store of wealth for more than 5,000 years.

And right now, that simplicity is gold investment's unique appeal.

Buying Gold is as far as you can get from today's complex and exotic debt markets. They're making headlines for all the worst reasons, as banking stocks plunge, mortgage-bonds go into default, and losses pile up at hedge funds. Gold, on the other hand, is recording near three-decade highs, and it still doesn't owe anything to anyone.

In our current financial marketplace, that makes gold bullion rarer still.

Gold Bullion Investment: Gold vs. debt

Gold bullion's lack of "default risk" also sets it apart from the mountain of debt built up by Western consumers and their governments. The average British household now owes nearly £9,000 (almost $18,000), and that's before you account for their mortgage debt! The US government has run up $9 trillion in debt, much of it owed to fast-growing Asian economies like China and all of it waiting for US taxpayers to make the repayments.

Even in Europe, the single currency Eurozone now faces a housing-debt slump in Ireland, Spain, Italy and Portugal. And compared to this epidemic of debt, very few people own gold. Fewer still buy Gold Bullion and own it outright, in their name alone.

Put your strategic capital in partner with Zinc as its use increases in Asia

Zinc consumption in Asia is on the rise and two major sectors — galvanised steel and batteries — are in no mood to calm down at present, pointing towards a further rise in the use of the metal.

According to reports, the consumption during January-September 2007 on a y-o-y amounted to 4,505,000 tonnes in Asia, an increase of 4.67 per cent as compared with 4,304,000 tonnes in the corresponding period last year.

The strong demand has come at a time when its average price was $3,452 a tonne on the London Metal Exchange (LME) during the period under review, as compared with $ 2,965 a tonne in the same period in 2006. Zinc currently trades at about $2,320 a tonne on LME (see Zinc News ).

Market experts said the weakness in prices will continue in 2008, too, as the global refined. Zinc metal production is expected to increase 7.8 per cent to 12.2 million tonnes in the year and (see Zinc News).

Hindustan Zinc will increase production with the commencement of its 170,000-tonne zinc smelter operations.

Your strategic capital portfolio in partner with emerging markets and iron ore

China, the largest steel maker in the world, will increase iron-ore imports as output is peaking at mines in the country, bolstering prices that have tripled in five years. What is going to be crucial in driving the international demand for iron ore is what happens to domestic production in China. Already this year there have seen signs of the Chinese exhausting their potential to grow. It is inevitable over the next few years that production will start to peak and fall off.

BHP Billiton, Rio Tinto and Vale do Rio Doce, who supply 75 percent of the iron ore in the world, are planning to expand existing mines and dig new ones with prices tipped to rise as much as 50 percent next year, according to Goldman Sachs JBWere.
The booming Chinese economy is on course to exceed $3 trillion as early as this year, tripling in the space of a decade.

The country is importing more materials including iron ore, crude oil, zinc, copper and aluminum, driving up prices for the commodities.
Annual demand for iron ore in China may rise to more than 1 billion tons, from about 713 million tons this year, as demand for steel continues to rise, Lennon said.

Some sources believe that the domestic market in China will fall by several hundred million tons over the next 10 years, that will then lead to an accelerated requirement for imports of iron ore.

Chinese domestic iron-ore production doubled over the past three to four years to about 330 million metric tons this year.

Investment in new mines has declined and the grade of iron being produced from existing mines has dropped, he said.

Demand for the ore will reach 829.5 million metric tons next year as the nation adds steel making capacity, Lian Minjie, the general manager of Sinosteel's mining unit, said Nov. 15.
Demand will reach 958.1 million tons in 2010, with 10 percent growth in 2008 and 5 percent growth in 2009.

China, which produces one third of the steel in the world, may add 100 million tons of steel capacity by 2010. The government has called on local mills, including Anshan Iron & Steel and Panzhihua Iron & Steel, to produce more iron ore locally.

Contract iron-ore prices, which are set for 12-month periods, have risen for the past five years on increased demand from China, and may gain 50 percent next year, Macquarie said last month. The price could rise more than 50 percent due to recent gains on the spot market, Goldman Sachs JBWere analysts said Nov. 21.

The price of iron ore arriving at Beilun, where the largest steel maker in China receives shipments, rose 4.2 percent last week to 1,500 yuan, or $203, a metric ton, the highest since the data began being collated by Bloomberg in June 2006.
Prices will rise substantially next year, Rio's Sam Walsh, the chief executive officer of Rio's iron-ore unit, said Monday in London, where the company is based.
Tom Albanese, Rio's chief executive officer, approved the construction of two new iron-ore mines in Australia this week, and increased the company's global output target to 600 million tons at a cost of $26 billion.

That is more than four times the 2006 output of 133 million tons of the ore.
BHP, bidding $128 billion to take over Rio in the biggest mining merger in the world, has approved a $2.2 billion expansion to increase iron-ore output in Western Australia by 20 percent to 155 million tons as early as 2010. The third-largest iron ore producer in the world started a preliminary study to almost double output to 300 million tons (see Iron&Steel News)
Vale plans to spend $10 billion on an iron-ore project in the Amazon to help meet surging
Chinese demand for steel.

China is scouring the globe to secure supplies of raw materials to feed demand for goods like autos and appliances. Baosteel, the biggest steel maker in the nation, plans to buy rivals to triple production capacity by 2012.

Strategic capital and portfolios partnering the world of private equity

What is a private equity fund?

A private equity fund is a pool of capital invested in companies that are not typically publicly traded. The investors in a private equity fund agree to make contributions of capital over a specified time period. The manager of the fund calls on the investors’ commitment as the funds are needed.

There are a number of strategies that private equity funds use. They may be involved in leveraged buyouts or management buyouts of existing, mature companies. They may provide venture capital financing to start-up companies, or to companies that have not yet had an initial public offering. They may provide mezzanine or subordinated debt financing, either when the owners of a company want to limit dilution of ownership, or when a company is in financial difficulty.

Individual private equity funds sometimes focus on a specific industry, such as life sciences, but often broaden their scope to several industry specialisations. Generally, they require a minimum investor commitment of US$5 million to US$10 million.

What are the benefits and pitfalls of private equity funds?

Private equity funds have historically provided a greater return on investment than investments in public companies. In addition, returns are not highly correlated to the stock market, so they provide useful diversification.While returns are not guaranteed, the 20-year average is currently about 14% to 15% per year. In the early years, however, an investment return is likely to appear negative while cash contributions are made to the private companies before they achieve measurable results.

The main drawback is the length of commitment. Investors who choose a private equity fund should be prepared for a commitment of 10 to 12 years. The commitment is irrevocable: there is no organised secondary market for private equity funds and there are no withdrawal windows.

What type of investor should consider private equity funds? Private equity funds are suitable for patient investors who understand the investment’s long-term nature and who can afford to let their capital develop over a few years without seeing any initial return on investment. Whether it is an appropriate investment depends on the individual investor’s tolerance for risk and level of investable assets.

One of the best ways to reduce investment risk in this category is through a “fund of funds” approach. A fund of private equity funds invests in 10 or more private equity funds in different industries, creating a more diversified portfolio. In addition, it provides the investor with professional fund management, including access to investment data that may be unavailable to individual investors. It is also a more affordable way to properly diversify an investment in private equity funds.

What role should private equity funds play in an investor’s portfolio?

Investors should always focus on their overall investment goals and should consider how a private equity fund will interact with the other investments in their portfolio. It’s important to recognise that an investment in private equity funds will be the longest-term portion of an investment portfolio.Private equity funds typically represent 5% to 10% of a wealthy investor’

Allocating Strategic Capital for your portfolio

Gold Ownership or Bullion or Stocks?
Assuming you have already decided to own Gold to diversify your overall portfolio, you may then ask the following question.
What form of Gold should I purchase?
Should I buy physical metal such as bullion coins or bars, or would mining stocks be better?

It is often recommended by portfolio managers to place your strategic capital into a combination of both physical metal and mining shares to maximize performance, and minimize risk. Owning physical metal enjoys certain advantages over owning the mining stocks and visa versa, but a combination provides the best way to protect and grow a portfolio in difficult and uncertain financial times. Gold investors must choose for themselves how to split up their Gold allocation. It is important for investors to be certain that the Gold items they own are the ones that will best serve their purposes. While each investor’s circumstances are different, the discussion that follows should give some ideas on how to best divide Gold holdings.

What are the differences between owning physical metal and owning stocks?

The obvious difference is risk. On the investment pyramid of risk, physical ownership of Gold would be on the lowest tier (least risk) with cash and life insurance, while ownership of Gold mining shares would be classified on the second or third tiers (higher risk) depending on whether you own shares relating to a major Gold producer or a junior mining company. In general terms, owning physical metal is more of a "saving", whilst owning mining shares would be considered more of a "investment". There is an increase in risk when investing in stocks. However, with increased risk comes greater opportunity for return. Thus both should be considered.

A second factor to remember is that a Gold mining share is not Gold. It is a company stock first and then secondly can be construed as Gold. A Gold mining share is NOT a substitute for the physical metal. It represents a claim against potential Gold deposits in the ground and not the actual Gold itself. Stock ownership often has inherent risks that are associated with investing in company stock. Stocks often represent debts, liabilities, risks – monetary, environmental, political, etc. Physical Gold is an asset, the only financial asset that is not simultaneously someone else's liability. Owning physical Gold is essentially risk-free as long as you retain possession. Obviously its value can go up or down according to market fundamentals/fluctuations, but you can hold it securely in your hands. Physical Gold does not need cash flow or management to insure its ultimate survival.

Some other items to consider:

Physical Gold ownership does not pay dividends. Mining stocks can pay dividends when profitable.

Physical Gold ownership has protected investors during periods of economic depression, wars and political unrest. Mining stocks could be negatively affected in such times as stock markets may be closed or adversely affected for a time.

Physical Gold can be used for barter or purchasing life sustaining items during crisis times. Mining shares would be harder to use for such purposes.

During a bull market in Gold, the physical metal prices will go higher, but the Gold mining shares are leveraged to the physical price. In other words, as the price of Gold rises, profits from mining stocks rise even more in percentage terms. Generally, over the longer term, the share prices of the major Gold producers rise by a factor of two to three times more than the price of Gold. Successful early stage junior mining and exploration companies can rise by a factor of 5 to 10 times more than the price of Gold. The reason for this leverage is that a rising Gold prices do not have any effect on the cost of production. Therefore, for companies that are already profitable, incremental revenues received from selling Gold at a higher price flow straight to the bottom line. A price rise also increases the value of "in the ground" reserves without capital investments. For mining companies that are not profitable, a rise in the Gold price can suddenly lift them into profitability.

Any potential investors would need to consider what their objectives are for considering Gold before they can correctly decide what class of items to purchase. Some people who are more savings oriented, tend to emphasize owning the metal, while others who are looking to make a big return would tend to emphasize the mining stocks. Mining stocks can produce spectacular returns at times, but can also exhibit volatility.

Why Invest in Junior & Exploration Companies?

Leverage is the simple answer. It is not uncommon for early stage junior mining and exploration companies (hereafter, Juniors) to experience huge gains (10 times or more) very quickly as news of a discovery is made. But before talking more about leverage here are some facts:

In the mining world, it is no secret that the majority of economic mineral deposits are found by the junior mining companies or prospectors. There are several reasons for this. Junior explorers are not slow-moving bureaucracies like many established and large resource companies (hereafter "Seniors"). This makes Juniors able to make fast decisions both in the boardroom and in the field.

Seniors generally have a different role to play, namely, to fund and place into production deposits discovered and developed by Juniors. But perhaps chief amongst the most important reason Juniors tend to make most discoveries is that they are hungry and entrepreneurial, in other words: the talent, motivation and dedication of their management team. Exploration is, to some extent, a creative enterprise.

It is often said in the mining business, that if an exploration geologist finds a mine it is likely that he will find others. It is a fact that fewer than 5% of all exploration geologists will ever have the credit of a discovery that leads to a mine, which proceeds to the production stage. This is because those few select, gifted explorers who find numerous mines, seem to possess a sixth sense that moves them to succeed in this area. Most of the true and successful leaders in mineral exploration are geologists that don’t necessarily fit into the corporate culture. They are field geologists who do not generally sit behind desks, stare at computer monitors and talk on the phone, preferring instead to be out in the field. Whilst the majority of geologists may have a firm grip on the theory of mineral exploration, they cannot take it to the next level to unravel Mother Nature’s secrets.

As is often the case Juniors are managed by men and women who have had success working for both Senior and other Junior companies. So why would someone want to be a director of a junior mining company that has no revenue and sometimes not even a decent salary to offer. It is the potentially huge rewards that can come when a discovery is made that attracts the top talent of the mining sector into the Juniors. In other words, they want to work for themselves and get the big payoff, instead of earning a nice salary with some kudos if they made the discovery whilst working for a Senior company. In a major mining company, a successful exploration geologist who made a significant discovery might get a pat on the back and a new credenza, if they’re lucky. As part of a junior mining company, the geologist who made that same discovery might profit considerably from the $10 million, $20 million, or a $100 million capital gain from any discovery made on the part of their efforts. In the life cycle of a mining share, it is the exploration phase that provides the biggest move (leverage) in share price. The best and brightest "mine-finders" of course know this and are highly motivated to search the world over to make a new discovery. When they do, the monetary rewards are substantial, for both the management team and its investors.

Because the mining sector has been in a long-term bear market, very little major corporate mining money has been going into the search for new deposits. Exploration expenditures declined drastically from 1997 into 2001 as the brunt of the bear market took its toll. Since then, we have seen the start of what looks to be a major bull market in the precious and base metals. Exploration budgets are cranking up again as the search for new deposits is greatly needed to replenish depleting reserves. With this renewed interest in exploration, demand for good exploration companies is increasing in the capital markets and the junior mining sector is once again showing spectacular gains. As the spot prices of the minerals continue to rise, we are also likely to see an exponential rise in the share prices as additional capital comes their way.

One source, Richard Russell (a prominent writer on mining and commodities investments), has this to say about the current bull market in precious metals:

"..I believe that fortunes will be made in the years ahead by those who are now establishing major positions in Gold and Gold shares. These primary moves last longer than anyone thinks possible – and they take the items higher than anyone thinks possible. We are now in a primary bull market in Gold. I believe Gold (and very probably silver) will make fortunes for those who now take major positions in the precious metals…"

Huge Leverage

The increase in the mineral prices not only focuses more attention on the sector, but also causes even more money to be spent on exploration thereby increasing the probability of finding new deposits. It also increases the value of any potential discovery through leverage. Mineral deposits are gauged, in financial terms, by the "Net Present Value of Future Cash Flows" formula should the deposit be mined. Say for example we find a million ounce deposit of Gold and an engineering study suggests it could be mined over ten years at a cost of $250 an ounce, including capital. Let’s assume Gold is at $350 an ounce. Lets also assume a 10% discount rate (over 10 years) and we find that the deposit would be worth roughly $70 million. However if the Gold price were to increase to $400 an ounce (a 15% increase) the value of the same Gold (with the same parameters) increases to $100 million (almost 50%). That is over 300% leverage to the Gold price. Increases, obviously, have an increment benefit.

Suggestions for Gold Investors Options for acquiring gold can take several forms. Investors interested in gold may want to consider investments in gold producing companies either as an alternative to or along with any bullion type of investment. Improved sentiment towards precious metals is producing an equity financing boom for gold companies, from substantial producers to junior explorers. There is a tremendous demand for gold shares at the moment. The gold price is rising and many astute investors are turning to the smaller "Junior" gold mining companies that enjoy a debt free history, un-hedged production and large reserves still to be mined. Many investors feel these smaller mining companies will continue to reflect the movement of gold as it continues to advance, albeit without the unnecessary risks attributed to investments in both the bullion and futures markets.

While gold continues to rise, the search is on to find these "Junior" mining companies still in an early stage of growth. In addition, a race is on by the "Senior" companies to take over smaller mining companies holding proven reserves, and investments in Senior companies which have recently acquired large reserves should also be considered.

With the expectation of aggressive returns, however, great attention must be paid to the technical factors of: yields, testing results, reserves and operational cost(s).

What is the relationship with Gold and Private equity?

The price of Gold has smashed through the $800 per ounce level and now seems set on achieving $850 per ounce before year-end. That is where we stand today, but who was it that saw the meteoric rise of this precious metal about to happen back when it was languishing below $300 per ounce? Of Switzerland’s many private equity groups, several groups can claim they saw it coming and made early moves to ‘ride the wave.’

In 2003 Strategic Capital Portfolio Partners AG of Zurich came out and said they were seeking and reviewing many junior mining companies with potential, while Investec was actively aiding Harmony with their acquisition of Avmin and its 42.2% stake in Avgold. Household names have also been active: CSFB Private Equity, a unit of Swiss banking behemoth Credit Suisse Group, had been turning its attention to mid-cap gold companies as early as the year 2000.

The ability to see the next "big thing" is essentially what private equity groups look for. All investors want to be part of that next big thing. Some of these private equity groups actively seek new investors while other are more select and will only allow a limited number of new "members".

In forthcoming articles we will seek to discover the secrets of some of Switzerland’s foresighted Private Equity groups who seem to have the power of looking into tomorrow.

To be continued....

August 7th 2007 - Where is gold going?

With gold now comfortably maintaining a level of around $670 per ounce, something it seems to have been doing for most of this year, the question has to be asked, where is the best place to put your strategic capital and where is the price going?

Oh for a crystal ball. For every pundit who tells us the price of gold will reach $1000 per ounce in the very near future, there will be another laughing in his face telling us gold has had its day.

Many voices in the private equity industry who have been involved in mining and commodities over the last few years (one of them being Strategic Capital Partners Portfolio Management AG), is still calling for $800 by early November and a years finish of over $850, but they caution their speculation with advice to concentrate on Junior producers rather than merely small exploration companies or the physical asset itself.

Lack of major new discoveries by major gold producers is expected to be one of the major driving forces behind any new upward movement in gold.

Many of the world’s biggest gold producers are casting their nets far and wide for new resources, while the medium sized producers, many still battling with profitability, have largely cut back their exploration. Many seem to believe that finding a junior gold producer in an investment position is the answer. The junior having done the lion’s share of the hard work to prove up resources and often leaving a large area of only ‘probable reserves’ as a tempting possible bonus for any major that might buy them. Discovering one of these hard working juniors can be almost as hard as finding new sources of gold itself and now seems to be the goal of many investors at the moment before the junior is snapped up providing possibly huge profits for the canny investor.

At the time of writing, Harmony mines, one of the worlds larger gold companies, continues to suffer. Warnings of lower production and the resignation of Chief Executive Bernard Swanepoel do not bode well for the group. In comparison, GoldCorp continues to offer a healthy monthly dividend to investors, this month $0.015 per share. GoldCorp is one of the world's lowest-cost and fastest growing multi-million ounce gold producers with operations throughout the Americas from Eleonore Canada, down to San Martin, Honduras and as far south as La Coipa, Chile. Of all the quoted big producers, it is certainly getting something very right and is one to be following.

The fortunes of many of us interested in gold continue to rely upon the renewed gain in the yellow metal, but the secret is certainly knowledge of which horse to back in a complicated race.

To be continued.....