Platinum Protection South Africa

April 11, 1998
Founder & Chief Editor of Gold Eagle

Perception, whether based on reality or myth is a powerful force. When it is based on actuality, this is a reasonable thought process. However, if predicated on a myth, or something that is no longer true, no amount of reason can sway the opinion of a person who still harbors the perception created at an earlier date. I am referring - of course - to the perception of some investors that South Africa represents an unstable political environment.

Without a doubt this was the case a number of years ago. But much has transpired in recent years that brought about dramatic and welcomed changes in South Africa. Today many experts within South Africa and internationally feel that it is as stable as most industrialized countries, and more than others. For example, the currency and market turmoil ravaging the Southeast Asia is tumultuous at best. The Middle-East continues to be a boiling caldron. There is talk of impeachment in the US due to unbridled, promiscuous sexual habits, unbecoming a President. North Korea continues to menace its brother to the south. There are more, but you get the idea. Frankly, it is my considered opinion that South Africa by comparison to the above is a paragon of conservative stability. Nevertheless, there is the perception by some investors that South Africa represents more political risk. Therefore, the objective of this report will be to address the perception of this group - and suggest a proof-positive way these skeptical investors may take advantage of the incomparable intrinsic-valued gold mining stocks in South Africa.

A Comparative Study of Gold Stocks

South African gold mining stocks demonstrate far greater value in gold reserves than its counter-parts in North-America or Australia. An in-depth report forces one to conclude South African mining stocks represent far greater value per share than the other two areas. The results are not even close! In fact the conclusion is overwhelmingly in favor of the South African golds. The report's title is "GLOBAL GOLD COMPARATIVE ANALYSIS" - and may be seen at:
http://www.gold-eagle.com/gold_digest_98/vronsky032798.html

There is NO hype in the study. And the numbers speak for themselves. Following are some of the more salient observations. For simplicity, the following abbreviations will be used:

SA - South African gold stocks
N/A - North-American gold stocks
Aus - Australian gold stocks

Gold Reserves Per Share

SA owns nearly SEVEN TIMES more gold reserves per share as N/A

SA owns FORTY-SEVEN TIMES more gold reserves/share as Aus

Market Price Per Ounce

N/A shares reflect a market price of $138.09 per gold reserve ounce
Aus shares reflect a market price of $172.00 per gold reserve ounce
SA shares reflect a market price of ONLY $12.01 per reserve ounce

Market Price Per Ounce - Expressed Differently

N/A gold reserves are more than 11 TIMES more expensive than SA
Aus reserves are more than 14 TIMES more expensive than SA

It is painfully obvious that an investor is paying through the nose by buying the extravagantly over-priced North - American and Australian gold stocks. Why pay $138 or $172 per ounce for gold reserves, when you can get the same 24-Karat ounce for 12 bucks and change in South Africa?!

BUT, some investors continue to harbor the perception that there is more political risk in South Africa, so they do not purchase the higher intrinsic-valued Johannesburg gold stocks at a much lower price. Although their perception is today's myth, their FEAR IS INDEED REAL. And therefore must be addressed. Consequently, we will present a way by which these doubtful investors may take advantage of the far better valued South African golds, BUT mitigate the "political risk" to the vanishing point. Here's how.

Hedging South Africa's "Political Risk"

We assume you are in agreement that a new gold bull has begun - that gold's low last December was indeed the bottom.

Our example contemplates an investment of $100,000 (it could really be any amount - more or less). You make an investment in two to four South African gold stocks - diversifying your company risk.

To hedge ALL POLITICAL RISK, you buy ONE PLATINUM FUTURES CONTRACT. The average margin you must put up is a mere $2,025 - allowing you to control 100 ounces of the metal. This is your hedge INSURANCE against any and all South African "political risk."

Now for our example let us assume the worst: total political strife erupts in South Africa for whatever reason. All mines are shut down - GOLD AND PLATINUM. To appreciate the following logic, please recall South Africa produces more than 80% of the world's supply of the precious white metal - whereas it accounts for only about 25% of the world's gold supply. Subsequently, platinum prices will immediately explode worldwide. Based upon historic precedent, we estimate the white metal could easily rise at least 200% in value in a very short period. To substantiate our estimate we show below similarly dramatic platinum price increases of the past.

PERIOD PERCENT INCREASE
1966 to 1968
1972 to 1974
1978 to 1979
1982 to 1983
1985 to 1986
122%
185%
413%
108%
181%

The average increase of the last five bull markets in the white metal saw platinum rise 202%. So our estimate is right in the ballpark.

In our hypothetical political upheaval we further estimate all South African gold stocks will soon sell-off by 50%. We seriously do NOT see a greater plunge for the following important reasons. Firstly, the Johannesburg All-gold Index is presently still down 62% from its 1994 highs. See chart.

Secondly, no matter who ends up in control of the government, it will immediately reopen the mines for production. WHY? Because they will need the money to rebuild. Consequently, we believe the sell-off would contain itself to less than 50%. In our example investment this would represent a loss of $50,000. But let's examine what our hedge appreciated. To be ultra conservative we will look at two scenarios: A 100% increase in spot and futures platinum prices, and a 200% increase which equates EXACTLY to the average price appreciation during the last five bull markets in the noble white. The futures base price used is $422 at the time of this writing. Here are the stellar results.

Price Change Price/Ounce Profit/Contract
100%
200%
$844
$1,266
$42,200
$84,400

Note: Platinum's all-time futures high was $1,050/oz in early 1980.

If the world price change for platinum were limited to only 100%, it would signify that the political situation in South Africa was not that serious - therefore the gold mining shares would lose much less than 50%. The hedger would then most probably be totally covered - balancing his gold stock loses against his platinum futures gains.

In the event the platinum futures price soared to its five year average bull market gain of slightly more than 200%, the gold share investment would be more than hedged - in fact it would enjoy an overall fat capital gain on the combined investment. It is noteworthy to recall that the profit guaranteed hedge required the additional investment of ONLY $2,025 in margin for the platinum futures contract.

Caveats

The above hedge presupposes that you are already bullish on the precious metals. If you are wrong, and all precious metals head south, inevitably you will lose on both the gold shares and the platinum futures investments. However, assuming our prediction that precious metals have indeed bottomed, then we may invest more aggressively and wisely.

That being the case, the above hedge will mitigate all concern for the perception of any "political instability," and allow the person to invest in the higher intrinsic-valued South African gold stocks.

On the other hand if the precious metals bull continues without any civil strife in South Africa, the politically hedged investor will indeed do very well with substantial gains in his gold shares and platinum futures positions.

In Summation

Per historic conditions the purchase of one platinum futures contract would more than offset a $100,000 investment in South African gold shares IN THE EVENT OF A SELL-OFF DUE TO A POLITICAL UPHEAVAL IN THAT COUNTRY. But since the minimum margin for a platinum futures contract is only about $2,025, it would be doubly prudent to go long TWO FUTURES CONTRACTS. Those who are burdened with the perception of South African "political instability" would most probably feel more comfortable.

It is my personal and considered opinion that 1998's best performers will be South African Gold Stocks - reminiscent of 1993.

Founder of Gold-Eagle in January 1997.  Vronsky has over 42 years’ experience in the international investment world, having cut his financial teeth in Wall Street as a financial analyst with White Weld. Vronsky speaks three languages with indifference: English, Spanish and Brazilian Portuguese.  His education includes a degree in Petroleum Engineering from the University of Oklahoma, a Liberal Arts degree from Hartnell College and a MBA in International Business Administration from UCLA – qualifying as Phi Beta Kappa and Tau Beta Pi for high scholastic achievements.  Vronsky believes gold and silver will be recognized as legal tender in all 50 US states and many countries worldwide.  You may reach I. M Vronsky at: vronsky@gold-eagle.com and/or vronsky@bellsouth.net

India is perennially the world’s largest gold consumer.

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