Alarm bells ring for gold

Johannesburg - Investment in gold will be the driver to push the price to $1 100 or more this year, further damaging an already battered jewellery sector and increasing scrap supplies into the market. Prices will come off over the next five years as that investment dries up and retreats, says GFMS CEO Paul Walker.

It's difficult to be too definitive about what will happen in the gold market, with a number of variables feeding into forecasts for the price. What benefits one side of the equation has a negative consequence for the other.

Investment in gold in a period of tremendous economic upheaval pushes the price up to record highs but the consequence is that a "bedrock" sector of the market, the jewellery making and retail business, takes a pounding as buyers look for cheaper alternatives or stay out of the market until prices come back down.

"Over the last two or three years, the only thing that sustained the gold prices we've seen has been investment demand," Walker said. "Investment demand has been strong and consistent enough to take metal off the market to sustain those prices."

Indian scrap sales have been modest on expectations of higher rupee gold prices, but there have been relatively heavy flows in the Middle East, North America and Europe, made up of distress selling or people needing to raise cash, and from trade stocks, Walker said.

"This is where we start to sound the alarm bells for the long-term sustainability of high gold prices because the supply chain for gold jewellery, which is still the bedrock of this market, is slowly but surely being eroded by these high prices," he said.

GFMS, the London-based metals consultancy, forecasts that scrap, which has increased substantially in the year-to-date, will most likely be higher for the full year compared to 2008.

According to GFMS data, scrap supply in the first quarter of 2009 has surpassed the sharply lower amount of gold used in making jewellery, the first time in nearly 30 years.

"That tells you that jewellery fabrication has contributed negative demand for the first quarter. It's a remarkable and frightening prospect. Does this continue or doesn't it? If you're forecasting where the market is going you have to make a judgment call on this particular dynamic," Walker said.

Wall of scrap

"What's happened in the first quarter of 2009 is an absolute phenomenal wall of scrap coming back onto the market. It's come from everywhere," Walker said. "It does start to sound the alarm. Is this a once off?"

"I think the second quarter will be very revealing if we see the gold price move back over $1 000 and above. It's absolutely critical as to what happens to scrap as to what the sustainability of this is."

Stripping out scrap flows into the gold market, Walker argued that there was not enough demand - be it jewellery fabrication or industrial offtake, which has taken an "absolute kicking" - for the gold currently being mined and that the excess was being mopped up by investors seeking out a safe haven for value.

"I believe investment will be a key feature in this market for the balance of this year and possibly 2010," Walker said. "But when that turns there is only one thing that brings that brings this market into equilibrium."

He said prices would have to drop - something that is likely if investment demand stops growing and becomes neutral if sentiment towards equities and bonds changes - to bring in physical demand for the metal to return to the market to equilibrium. "There lies the challenge for gold. It's not the story for the next year or two but the next four to six years."

He argued that gold prices will be "a lot lower" than they are now in the next four to five years, which raises the possibility of the Chinese government diversifying its massive reserves to incorporate gold. It is thought to have largely held off doing so because of the high gold price and for fear of disrupting the gold market.

The large flow of scrap gold is generally ending up in vaults, predominantly in London, Walker said, estimated the private holdings over the past eight years have grown to be twice that of the 1 600 tonnes held in gold-backed exchange-traded funds.

He told an anecdotal story of JP Morgan advising a client in Japan that it was restricting silver storage to one container per day. "There's a wall of silver coming back into London," he said.

GFMS forecasts mine production will rise this year by between 20 and 30 tonnes, mainly on increased output from Australia, Asia and West Africa.

Central bank gold sales are expected to remain weak this year, with the International Monetary Fund sales of 403 tonnes of gold through the Central Bank Gold Agreement, which caps official sector sales at 500 tonnes, not expected before 2010.

"The IMF sales are already priced in and they don't really concern me. I don't think it will have that much of a price effect and won't be massively influential," Walker said.

He said he expects the Central Bank Gold Agreement, which expires in September this year, to be renewed and for the cap of 500 tonnes a year to remain in place. "I'd be extremely surprised if it's not renewed."

- Miningmx.com

G20 supports IMF's plan to sell 403 tons of gold

Endorsement signals plan likely to be approved by member countries this year

NEW YORK (MarketWatch) - Leaders from the Group of 20 nations Thursday endorsed the International Monetary Fund's plan to sell 403 tons of gold to raise funds to support the world's poorest countries.

The announcement from G20 leaders helped add pressures to Thursday's gold trading. Gold futures fell $20.30, or 2.2%, to $905.80 an ounce in recent trading on the Comex division of the New York Mercantile Exchange. See Metals Stocks.

The G20 vowed in its statement to "use the additional resources from agreed IMF gold sales for concessional finance for the poorest countries." Read more on G20.

The endorsement suggests that the IMF's gold sales plan is likely to be approved by its member countries later this year.

The IMF has been planning to sell gold since as early as 2007 to diversify its revenues and strengthen its balance sheet. But the plan needs to be approved by an 85% majority vote from its 185 members.

The U.S., which has 17% voting power in the fund, essentially holds veto power. The U.S. government has informed the IMF that Congressional authorization by law is required before it is able to support the plan.

The U.S. Treasury announced last year that it will seek authority from Congress.

Hussein Allidina, an analyst at Morgan Stanley, said in a note Thursday that he expects the IMF to implement the sales over the next few years, "but do not believe that this presents a strong negative risk to gold prices - as it will be 'orderly' and maybe even off market."

The US administration has seemed supportive, both for expanding the IMF's role as well as helping its long-term funding challenges. This makes the proposed IMF gold sales much more likely, as the US Congress effectively has a veto on this decision, with the US having a 17% vote on an IMF decision that needs 85% to pass.

Minimize market impact

The IMF, which holds more than 3,200 tons of gold, is the third-largest holder in the world after the U.S. and Germany.

Most of the IMF's gold holdings come from the fund's member countries, which are required to commit 25% of their quota in gold. The fund can't sell those holdings into the markets.

But an additional 403.3 tons of gold the fund acquired through off-market transactions in 1999 and 2000 - such as interest payment from countries that received IMF loans - are not subject to the restriction.

If member countries approved the gold sales, the IMF can find ready buyers in countries with low gold reserves, especially Russia and some Asian countries such as China, Taiwan, and India.

China, with less than 1% of its $2 trillion reserves held in gold, has expressed interest in buying more gold, crude oil, and other strategic commodities.

According to the IMF's plan, the gold selling will be implemented in coordination with major central banks to minimize the impact on the market.

The European Central Bank said Wednesday it had completed the sale of 35.5 tons of gold.

The gold sales were in full conformity with the second Central Banks Gold Agreement, which was signed in 2004 by the ECB and other European major official gold holders.

The second CBGA, which caps total gold sales of the signatories at 500 tons a year, expires in September. Some analysts expect a third CBGA to be signed before September.

Moming Zhou is a MarketWatch reporter based in New York.

Gold in line for a run

Gold set for 'decisive move' 
March 26, 2009

Johannesburg - Gold is poised for a decisive move upwards, the SA Gold Coin Exchange (SAGCE) said in a statement on Thursday.

The SAGCE said the SPDR Gold Trust, the world's largest gold-backed exchange-traded fund had identified a chart pattern showing that gold's short-term downtrend was about to clash with its intermediate-term uptrend.

The clash pointed to a decisive near-term price move - either up or down.

"We’ve noticed a similar picture on our charts," said Alan Demby, executive chairman of the SAGCE.

He added that it was his prediction that the gold price would move up.

Several factors, he said, prompted such a decision.

This included the fact that the intermediate-term uptrend has been tested on two occasions - in November last year and mid-January this year - with the likely result that it would hold again on this occasion.

Demby said there had been an unprecedented surge in demand for gold coins, which had resulted in the US Mint having had to stop producing its 2009 American Gold Eagle coin for collectors, reflecting determined global buying.

Demby said that as a proven inflation hedge, gold was starting to offer itself as a safe haven from the trillions of fiat dollars that had been created by the world's leading central banks. - Sapa

It is clear now that central banks are buying gold for their reserves.   Here is a brief history leading to today and the present position of central banks as they turn to buying gold.

 

Massive Gold Sales!

From the early 1980’s and for the next 20 years gold was under the threat of massive sales from the world’s central banks.  Many commentators reported that the overhang of gold above the ‘open’ market was so great that such sales would eventually lead to central bank reserves in the developed world having no gold at all.   Central Banks had further worsened the situation by loaning gold to mining companies, through the bullion banks, allowing them to finance gold production to a far greater extent than warranted by the price of gold during that time.   This acceleration in the production of gold allowed the gold price to be pressed down $850 to $275, the point at whichBritain, at the instruction of the current Prime Minister Gordon Brown instructed that Britain sell the bulk of its gold reserves.   From the turn of the millennium this perspective changed dramatically.

 

Limitation of gold sales by central Banks!

In 1999, through the establishment of the Washington Agreement, the signatories announced to the world that it need not fear uncontrolled sales of gold reserves for the next 5 years.   While the U.S. and Japanwere not signatories, they gave tacit agreement to such a limitation.  Since then neither of them have sold gold on the open market. Following the end of the ‘Washington Agreement’, a second agreement, called the Central Bank Gold Agreement, extended the situation for another five years.   This agreement ends on the 26^th September this year.  Sales were limited to the sales previously announced by the signatories, with the exception of Belgium and Spain who made no prior announcement to their sales. Under the Washington Agreement these were limited to 400 tonnes a year.   Under the second Agreement the sales were limited to 500 tonnes a year.   These limitations have not been met under the second agreement as sales are below this limit so far.

 

The halting of Central Bank Gold Sales!

Of great significance has been the actual slowing of gold sales from European banks, which appear to have lost all appetite for gold sales.  Indeed France was an unwilling seller, but under Presidential instruction has done so.   Italy has had no plans to sell any of its gold.   Germanyhad the option to sell 600 tonnes but has not taken this option up.  Switzerland took some of this but has ceased selling now.   It would be surprising if the signatories sold more than 150 tonnes of gold let alone the ceiling amount of 500 tonnes by the 26^th of September this year.  And next year, we expect no such sales [the I.M.F. sales are potential sales that  are not part of a central bank gold selling policy] from central banks.

 

Central Bank buying of gold for reserves!

Just as the tide turned from damming gold in the monetary system in 1999 it appears we are rapidly approaching another watershed in the history of gold in the monetary system.

 

Countries not seen as an important part of the global monetary system have, in the last few months, turned buyers of gold.   Ecuador [28 tonnes - 920,000 ounces - doubled its reserves from 26.3 tonnes], Venezuela bought gold [ 240,000 ounces - 7.5 tonnes - taking it up from 356.4 tonnes] , but this is not deemed of great significance.  

 

Russia at last, after talking about it for over one year has begun to buy gold.  It was reported that Russia has bought as much as 90 tonnes of gold for its reserves, lately [Previously it held 495.9 tonnes].   This is much more significant as it is a large figure in the small gold ‘open market’.   Prime Minister Putin is reported to have said thatRussia wants to see gold forming 10% of Russia’s reserve.   The slow process of getting them up to that level could have begun.   Even soRussia has little influence on global central bank thinking, so such increase are not thought to directly influence the principles behind gold as a reserve asset.     So as not to minimize such purchases, if Russiawere to keep up this pace of acquisition, it would be able to buy 360 tonnes a year and have a very significant impact on the gold price.

 

But the principles behind gold, as a reserve asset, are affected far more by the following news.   Last week the European Central Bank reported that one signatory to the Agreement purchased gold [which for the first time we have seen them do it], because the purchase was not simply of gold coin [which has happened before – seemingly for good housekeeping reasons] but simply “of gold”.  In other words the ranks of central bank selling in Europe have been broken and one has turned buyer!

 

We feel more positive now in our belief that European Central Banks are unhappy sellers and are inclined to change their views to the buy side.   The very fact that one central bank in Europe has turned buyer confirms this.   There is little doubt in our minds that there are conflicting views now amongst the heads of the leading European central banks on gold now.  

 

 

Major changes taking place in central bank policies on gold!

According to the World Gold Council’s new chief Executive AramShishmanian, in the Middle East the new monetary union there intend to have “gold play a prominent role in Gulf CC economies.”  He said, “It may play a role in that basket of currencies on which the GCC common currency will be pegged”.  Of course, please bear in mind that the inclusion of gold in a basket of currencies, would simply be for valuation purposes and does not, of itself, imply that these central banks will buy gold for their reserves.  

 

He continued, “Gulf central banks, along with the central banks ofBrazil, Russia, India and China are expected to increase their gold reserves.   Central banks with low reserves of gold are looking to increasing their reserves. They are trying to analyze what the right balance should be.   They are becoming aggressive.   Currently the belief is that if more than 20% of a central bank’s reserves are in gold, it is overweight, but this perception is changing!   The metal is becoming an assert class in the region and Gulf investors are looking at long-term investments in gold as a hedge against inflation.”    We are certainly not in a position to contradict what he says.   After all he has the resources and contacts to be authoritative on the matter.  

 

However after nearly 30 years of opposition to gold by central banks ands occasionally governments, it is a remarkable turnaround that tells us that gold is returning to the monetary arena again!  [The gold world has expected this for so long it feels a bit like seeing an oasis in the desert.]

 

If right, expect to see both Russian and Chinese gold production go straight into those countries reserves and not even reach the open market.   That will account for nearly 600 tonnes of supply disappearing.   Now add to that the halting of sales from European central banks, a perceived 500 tonnes a year.   If this trend continues gold, as an investment, will be fully rehabilitated.

 

Institutional demand will follow!

But this is by no means the largest effect that this change of heart will bring about.   The recognition by central banks that gold has a role in the monetary system will influence investors, both institutional and individual.   Should that happen and say 5% of funds placed in gold by funds such as Pension funds, then an amount of $920 billion, in the States alone, could head gold’s way.  Only a five figure gold price could accommodate that volume of money in the gold market.   Now add to that the same inclination in the rest of the world.   Any such rise in price will stunt the demand for sure, but be certain that gold is not simply in a bull market.

 

If the World Gold Council’s CEO is correct, then he will have confirmed that 2009 and 2010 will be the year that heralds the return of gold to the global monetary system!

 

 “Gold is always accepted and is the ultimate means of paymentand is perceived to be an element of stability in the currency and in the ultimate value of the currency and that historically has always been the reason why governments hold gold.”

 

Click here for the original article

The Gold and Silver Bull Market Won't End Before 2014 or 2015

It's more than a little odd and bewildering that both SILVER and GOLD PRICES have been correcting for more time than the 2004 and 2006 crashes, but so far at less price loss. In other words, the correction ought to be complete in time, but not in price. This jumps to the conclusion that 2008's correction has finished, and will be shallower in price than 2004 and 2006.

By way of comparison, the gold price has dropped 15.4% so far from its 18 March 2008 high, against 12.4% in 2004 and 21.9% in 2006. The silver price as of 1 May had dropped 21.6% from its high, but in 2004 dropped 32.8% and 35.4% in 2006.

Trying to mesh this with the metals' seasonal patterns leads to more bewilderment. Usually metals drop into end-June/July for a low after a high in May, then make another high in October/November. Sometimes, just to mess with your mind, they peak & trough in the opposite seasons. This year they peaked in mid-March(huh?) and looks like they will trough by mid-May, end-May latest. Will they then rise into the summer, the usual seasonal low? Or will they trade sideways until August and then begin climbing?

About the only near-certainty here is that this correction will have ended by May 31. Mercy -- it may have already bottomed. Proof of that will only come, however, by a successful test of the lows so far.

Now everybody has his head turned down, so what are the maximum lows we might expect? US$785 on gold and $13.29 on silver. But I've been through this enough times to know that bending over looking for a bottom you'll get a crick in your neck that puts a crick in your trading. You are looking for a bottom so hard that you miss it when it comes, looking for one further down. That's silly. Silver & gold are in a bull market. What if you buy today and they drop another 10%? The bull market's rising tide will bail you out. I've worried and vexed myself about every one of these drops since 1999, and now the difference between $4.05 and $4.50, or US$342 and US$310 seems like no difference at all.

Of course, this sort of weather also brings out the really gigantic croakers. They're now singing that the deflationary depression is coming that will take gold down to $35 again and silver to 25 cents, etc., etc. and the bull market in silver and gold has ended. Well,suum quique, to each his own, but I doubt it. The metals bull market began in 2001. It won't end before 2014 or 2015, if then. Stay with your positions, add to them while metals are correcting and low, and shut your ears to the croakers like Ulysses shut his crews' ears to the Sirens. His own he left open, but he tied himself to the mast.

STOCKS are rallying, and the Dow industrials should carry to 14,000. Dow Transports made a new all-time high on 30 April, and whether the Industrials confirm that or not, for now that fuels stock optimism. Rallying stocks helps silver, so don't complain, just don't get suckered into buying or keeping stocks. Stock rally seems destined to carry into summer, again, differing from the usual flat summer pattern.

The US DOLLAR INDEX is just a-rallyin' and a-rallyin', picking up all the easy money off the inflexible & unwary shorts. Look for this rally to work its way toward 77 before it ends, but it won't hurt silver or gold too much. They've already established themselves as the alternative currencies to all fiat national currencies. 

By : Franklin Sanders

www.the-moneychanger.com

Shining golden week

According to Alec Hogg, this week has been all about gold.

Felicity Duncan
19 March 2009 17:15 

With all the chaos in the world - big banks blowing up, normally responsible governments printing trillions with abandon, and even pirates trawling the high seas - it's understandable that investors are looking for the safest assets they can find, and this is where gold comes in.

As safe harbours go, gold is an all-time favourite. The gold price has rocketed upwards ever since the disaster-riddled nature of the global financial system became apparent. Right now, gold is trading at $950, and it's tapped to head upwards as the real economy sputters.

According to Moneyweb editor-in-chief Alec Hogg, speaking in the weekly Boardroom Talk Podcast, there can be little doubt that this week, gold has held centre-stage.

On the gold price, Hogg said: "[Thursday] was a big day for gold, [Wednesday] night when the Fed decided it was going to spend a whole lot more money, pulled out of thin air, gold bulls got excited, pushed the gold price up $35 and as we're talking right now, coming from a level of around 890, it's now trading 935 to 950."

"The Americans, certainly the mid-Americans or middle Americans, tend to love gold and they're going for it in a big way. Nick [Holland, CEO of Gold Fields (JSE: GFI)] said he'd just returned from America and he heard some fairly reputable commentators over there now talking about $2 500 an ounce."

"But what was interesting was the reasoning behind Nick Holland's view. He didn't say it would go to $2 500, but he also felt that it would go north of $1 000 in the not too distant future. He felt that the inflationary boosts that are going on in the United States are likely to have a direct impact on what he produces."

Mark Cutifani, CEO of AngloGold Ashanti (JSE: ANG), took a similarly bullish view.

"What was interesting and more supportive of this view, we had a ten minute chat on Wednesday ... after John Paulsonhad made an investment of 11%, or he paid just over $1bn for 11% of AngloGold [we had a chat with] Mark Cutifani."

"And what is interesting here, and Mark said he met John Paulson in the past, John Paulson, when you start digging into his background, is quite an incredible investor. Forbes magazine rates him as one of the top three. Steve Forbes said that if we were to have a Mount Rushmore for investors, in the United States - Mount Rushmore which you well know because you've been there, have got the heads of presidents on a mountain - and if we had them for investors, he said, it would be Bill Gross of Pimco, Warren Buffett and John Paulson. So that puts him right up in the very top league."

Paulson shot to fame after his hedge fund took a large bet against the sub-prime debt holders and house price.

Explained Hogg: "Personally he made billions of dollars. Last year he went from position 175 to a position in the top 75 on the billionaires' list and the primary reason for that is that his company, which has come from nothing, has now got assets of $35bn."

Given Paulson's investing acumen, and the prestige he now has, it's very interesting that he has chosen to get in on the gold game.

"He's betting on gold and more specifically he's betting on Mark Cutifani's firm, AngloGold Ashanti. So that's a very strong tip for us. John Paulson, who is like a Warren Buffett, makes [a] substantial investment in a South African-based company that is in the gold market."

"And we had [further] support of that as well in another of the podcasts with market commentators through the week - the one that is always the best read is with the Allan Gray commentators - and [Allan Gray director] Delphine Govender was explaining that they are overweight gold in the Allan Gray portfolios and overweight AngloGold in the gold side of the portfolios, so AngloGold is also their favourite."

For Hogg's insights on the Huge Group (JSE: HUG) SSF debacle, and the troubles of Super Group (JSE: SPG), check out the Boardroom Talk Podcast.

The Boardroom Talk podcast: All about gold

Interview with Moneyweb and Alex Hogg: All about gold

MONEYWEB [Felicity Duncan]: Hello and welcome to Boardroom Talk Podcast. It is Thursday, the 19^th of March and I'm sitting in the studio with Alec Hogg who is going to give us some insight into the events of the week. Alec, let's start talking about the gold price because there were some very interesting moves this week in that area.

ALEC HOGG: Hmm, all over the place. Today was a big day for gold, last night when the Fed decided it was going to spend a whole lot more money, pulled out of thin air, gold bulls got excited, pushed the gold price up $35 and as we're talking right now, coming from a level of around $890, it's now trading $935 to $940. It was interesting on the radio show and the interaction we had with a couple of chief executives from the, well in fact the two biggest South African gold mining groups, both of whom are very bullish on gold. Most bullish is Nick Holland, the chief executive of Gold Fields Ltd. It's interesting to note, I was going through our YouTube channel, that the interview we had with Nick Holland has been very well watched, in fact it's one of our top five interviews.

MONEYWEB: Those gold bugs out there, they just love it, they can't get enough!

ALEC HOGG: Well the Americans, certainly the mid Americans or middle Americans, tend to love gold and they're going for it in a big way. Nick said he'd just returned from America and he heard some fairly reputable commentators over there now talking about $2 500/oz.

MONEYWEB: It's amazing. You know, I heard this week that a Krugerrand back in '79 was R200.

ALEC HOGG: And it's now over R10 000.

MONEYWEB: Like that is serious asset depreciation.

ALEC HOGG: Well in fact it has been probably the best investment that you could have made, certainly in the last couple of years. But what was interesting was the reasoning behind Nick Holland's view. He didn't say it would go to $2.5 thousand, but he also felt that it would go north of a thousand in the not too distant future. He felt that the inflationary boosts that are going on in the United States are likely to have a direct impact on what he produces, but it was interesting, perhaps even more interesting and more supportive of this view, was our discussion with Mark Cutifani, we had a ten minute chat on Wednesday and this was after John Paulson had made an investment of 11% or he paid just over a billion dollars for 11% of AngloGold - Mark Cutifani, the CEO of AngloGold. And what is interesting here and Mark said he met John Paulson in the past, John Paulson, when you start digging into his background, is quite an incredible investor. Forbes magazine rates him as one of the top three. Steve Forbes said that if we were to have a Mt Rushmore for investors, in the United States Mt Rushmore which you well know because you've been there, have got the heads of presidents ...

MONEYWEB: Great big ones, ja.

ALEC HOGG: ... on a mountain and if we had them for investors, he said, it would be Bill Gross of Pimco, Warren Buffett and John Paulson. So that puts him right up in the very top league and not surprisingly because he's only 53 and he's very much a self-made man , started his business in 1995, a hedge fund, his hedge fund bet against the subprime bank owners...

MONEYWEB: Good bet!

ALEC HOGG: Fantastic bet! Well personally he made billions of dollars. Last year he went from position 175 to a position in the top 75 on the billionaires' list and the primary reason for that is that his company, which has come from nothing, has now got assets of $35bn and he's betting on gold and more specifically he's betting on Mark Cutifani's firm, AngloGold Ashanti. So that's a very strong tip for us.

MONEYWEB: Yes, it's fascinating. I heard the interview and Cutifani, when you asked him if he was going to drop the Anglo part of AngloGold, said that they were actually looking around and considering buying more assets.

ALEC HOGG: It is interesting that they are going on that kind of approach. He said nothing imminent yet, which is a bit of a giveaway for us journalists, to say that they're looking clearly quite seriously at some assets and likely to do, again it will be a high quality gold asset, you know that they have sold a few Bardington assets in Australia and one here in South Africa, to Simmers. But to me the big part of this whole thing is that John Paulson who is like a Warren Buffett, makes substantial investment in a South African based company that is in the gold market. And we had support of that as well in another of the podcasts with market commentators through the week and the one that is always the best read is with the Allan Gray commentators and Delphine Govender was explaining that they are overweight gold in the Allan Gray portfolios and overweight AngloGold in the gold side of the portfolios, so AngloGold is also their favourite.

MONEYWEB: They don't miss a trick, although ...

ALEC HOGG: Neither should we!

MONEYWEB: ... they've missed one trick, haven't they, with the news out of Super Group this week and they turned down, was it R17 a share offer ...

ALEC HOGG: It was R10 two years ago.

MONEYWEB: Ja, and then there was the one previously to that... Anyway, they turned down a lot of money for a stock that's now looking bad.

ALEC HOGG: Well it is. It just shows that no matter how clever they are and how good people like Allan Gray are, even they are fallible and I like their approach because they don't hide behind it. It's almost like the Warren Buffett approach that you trumpet your disappointments and speak quietly over your successes and she was very vocal in our discussions about Super Group, explaining that, yes, they didn't do the right thing two years ago when they had the offer for Super Group to be delisted, looking and back on what happened as recently as October where there was R500m was raised by shareholders, put into Super Group at a share price of R4. Allan Gray was one of the biggest of the supporters there...

MONEYWEB: Yes, they followed it, I remember.

ALEC HOGG: Now you've got to put this in context, that was R500m in fresh capital that was put in in October. The market capitalisation of Super Group today is 278, so ...

MONEYWEB: Value destruction...

ALEC HOGG: ... not only has half of that money, the fresh money that was put in, gone, but whatever it was worth at that stage when the rights issue was done, has disappeared. I thought Larry Lipschitz was disingenuous when he was on the radio, saying that everything started going wrong when there was a $5m liability from an Angolan operation that went bad. Now $5m doesn't collapse a whole firm...

MONEYWEB: No, it's not big enough.

ALEC HOGG: This firm's been going bad for a long time and Delphine is convinced that with the operations now having been cleaned up with all of the problems being taken out, that Super Group is in a position where it's going to make money, the management have got a long, long way to go to rebuild any credibility, as you would imagine, from a company that's come from R22 a share, to 45c.

MONEYWEB: Now he signalled that he might be leaving, Lipschitz, I mean he was a bit evasive about it, but he did seem to say that it was a possibility.

ALEC HOGG: Well if you presided over value destruction on that scale, I'm surprised that he actually sticks around and he did say he's doing that because of the 12 000 employees, he feels a sense of loyalty towards them and he wants to see this thing through and to his credit - there were many who felt as recently as six weeks ago, there was a strong rumour in the market that the banks were going to pull the plug on Super Group. So they've somehow miraculously managed to stay afloat. It looks with the billion rand extra that's going - now remember, a company worth R278m today, another billion has to be put into it just to keep it afloat...

MONEYWEB: It just shows...

ALEC HOGG: But with that going in, they feel that they will be able to turn the ship.

MONEYWEB: And it's a dilutive offer, right, four to one at 45c, so if you don't follow your rights, you're going to be vastly diluted.

ALEC HOGG: Well if you take it back to where you were in October last year and this brings in the black economic empowerment partner, Peu, Peu borrowed money from Deutsche Bank internationally, it had to sell a whole bunch of shares in October 2007 to pay part of the interest one presumes or, well who knows, but anyway, if you borrowed money to buy Super Group shares anywhere north of R5, you've got to be in big trouble now. So one doesn't know, is Super Group going to lead to the destruction of Peu? Well we've heard nothing from Peter ...... and his people. All Larry Lipschitz could say to me yesterday was he believes the Super Group shares are unencumbered, which is not surprising because they're not worth a whole lot anymore, but if you've got so much capital and you're trying to develop it and grow it, you would presumably be using that as collateral in other areas. So I think we are going to see some spectacular BEE collapses - Peu must be one of the favourites.

MONEYWEB: Absolutely. Now, there was a lot of nefarious corporate news out this week and one of the most interesting was the Huge Group, I know there was a huge story about their single-stock future misbehaviour. Do you want to maybe explain that?

ALEC HOGG: It's a very good story and it's one that shows so easily how you can confuse the public. I know they are trying their best, the two fellows behind Huge, to put a positive spin on it, but in essence what happened was that the two of them decided to cash in part of their shareholding. It was something that was offered to me in fact here at Moneyweb as well, when things were going up, the perpetrators of this kind of nefarious crime because that's really what they were, came to me and said, take part of your Moneyweb shareholding, sell it and then take single-stock futures to offset the amount that you sold and in that way you can release capital that you've got tied up in the business and of course single-stock futures, you buy them in at a pretty low level, so as they go up, you make your money.

MONEYWEB: Voila! And you hold your shareholding, you don't get diluted or ...

ALEC HOGG: And in theory it sounds good and of course as the share price went up, what happens with futures is that you get credited every day with the value of the growth. So all of a sudden from being worth maybe 10m or 20m, these guys were worth 40m, 50m and the money comes into your bank account, which you then presumably spend and it's happened in a lot of cases. But when the reverse occurs, where are you going to find the money to repay the cash that has come from you? Because as share prices go down, you have to keep topping up the margin and this is exactly what happened with the Huge Group. They did some kind of a deal with a stock broking company called Watermark, where the Huge company bailed out effectively the two directors at a price of 362c a share. That share today is trading at R1.20. The stock exchange has forced Huge Group to go back to its shareholders and ask them, "Would you be prepared to endorse the decision by these two directors for the company to buy these shares at 362c", and no shareholder who has got any sense whatsoever, is going to endorse that.

MONEYWEB: Absolutely, using the company money to protect your own...

ALEC HOGG: Some would say that it's fraud. The stock exchange is certainly throwing the book at these guys and it's not going to have a happy conclusion.

MONEYWEB: Well that's all we have time for, unfortunately, this week, but we will definitely hear some more from Alec Hogg next week, Thursday. So from the Moneyweb Boardroom Talk podcast, we hope you enjoyed it.