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October 2010
Agcapita Update
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Agcapita Update (continued)
What western economies need is more capital. There gold is being remonetised then here is an interesting
is no way to create capital other than through savings valuation methodology - determine what gold price
hence the ancient expression “what a wonderful is necessary for each unit of central bank paper to
revenue lies in thrift”. Printing money does not create be backed by that country’s gold reserves. If, for
capital, and worse, the inflation it creates ultimately example, you perform this calculation for the US
causes long lasting harm to the production structure using M1 as the monetary numerator you obtain the
of the economy. Think about the long-term damage following results: gold reserves - 8,133 tonnes, M1 -
being done by our governments when they subsidize US$ 1.8 trillion = gold price of US$6,888/oz.
failed enterprises - as Herbert Spencer reminds us
“The ultimate result of shielding men from the effects Gold aside, I continue to believe that one of the best
of folly, is to fill the world with fools.” ways to invest in commodities is to invest in cash-
flow positive production assets in politically stable
I believe that sustained real growth is unlikely to take regions of the world - i.e. rather than invest in the
place in the developed world until these nations stop commodities themselves, invest directly in the assets
engaging in capital destroying activities. A depleted that produce the commodities. Over the long term
and declining capital pool, combined with enormous you capture the value of the raising commodity prices
expansion of the monetary base and expanding with less volatility as they are ultimately capitalized in
government is creating a high probability of an the value of the production assets. In the interim you
extended period of stagflation in the west. are holding a cash-generating asset.
Asking for your indulgence one more time I would Kind Regards
like to talk a bit about gold. There is much public
speculation on whether or not gold is in a bubble. Stephen Johnston - Partner
If you believe that gold prices are rising because
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