This bull run is different

This bull run is different

David Carte

Posted: Mon, 03 Apr 2006 08:00 | © Moneyweb Holdings Limited, 1997-2006

A gold price above $580 is a rich nostalgia trip. It takes one back to the early 1980s, when a rand was worth more than a dollar – yes, that’s right, $1,35 compared to the current $0,17.

I seem to recall that the chairman of Nedbank, Frans Cronje, wrote in the 1980 annual report that, in the wake of the second oil crisis in 1979, the world economy had dealt (apartheid) South Africa “a permanently better hand of cards”.

The Club of Rome published “The Limits to Growth” in 1972. Its Malthusian Doomsday scenario predicted shortages of virtually everything. The world suffered its first energy shock in 1973. The second came in 1979.

With Sasols 2 and 3 already built, Cronje in 1980 reasoned, SA was 90% independent in energy. Energy and raw material costs would fuel inflation in the entire developed world. SA would prosper as a major supplier of commodities. And, as faith diminished in paper currencies, gold would continue ever higher.

Business and the financial authorities agreed fully. Man, did we spend! Many of the billions arising from our windfall were channelled straight to government and civil servants. More billions went into building a defence force, complete with nuclear weapons, to secure the interests of four and a half million paranoid people. Other billions went into freeways and infrastructure we still enjoy today.

Consumption and investment spending soared and Mercedes Benz reported that it enjoyed a higher market share in South Africa than anywhere else in the world.

Gold peaked well above $800 in 1980. By 1981, when it was last at present levels, it was on its way down. South Africans didn’t believe that gold would spend 25 years in the doldrums between $330 and $450 and, for a number of years, carried on spending.

The rest – stagflation followed by the economic revolution brought about by Milton Friedman and his early devotees, Ronald Reagan and Margaret Thatcher, sanctions against SA, the debt standstill, you know about. In short, things did not turn out as rosily for (white) SA as Frans Cronje forecasted.

What about now? Is gold’s uptrend sustainable? According to real experts, such as GFMS’s Paul Walker, it is and the best thing is that its strength is linked to that of other resources.

While physical demand for gold has waned at current high prices, Walker says investment demand has reawakened, in spite of higher interest rates in G8 countries. Gold is just another commodity adjusting to a new demand level after years of neglect.

Walker reports that even responsible pension fund managers are buying into commodity-backed funds and that these are obliged to purchase real metal. So the medium term outlook is positive.

Now there is a good and healthy tendency in the SA market. People have been scalded before and get nervous when it moves too dramatically. Bearish pundits quickly say “Whoah! We have come too far too fast”. They have cautioned about both the stock market and the property market. And there have been a couple of mild corrections.

Local valuations are not insane. True, the average price:earnings (PE) of the JSE has moved up fairly dramatically relative to Wall St and the London Stock Exchange – but so have the prospects of SA.

In the bad old days, when our average PE was half that of London, the world expected bloody revolution here. That threat has receded. We once had 4,5m economically active people. Now we have three times as many and a million new members of the middle class every year. Meantime some of our trading partners are involved in a costly war and a number, such as France, are in great turmoil.

The Reserve Bank is so far playing this boom cautiously. Governor Tito Mboweni greeted lower-than-expected inflation figures last week with a hawkish eye on bank credit. His moral suasion is in order, though it remains to be seen whether we can afford or successfully complete the enormous infrastructure spending spree that is planned.

As for investors. You have doubled your money. Stay exposed to equities but remember a lot of our present prosperity is based on commodity demand that could be partly speculative and could conceivably wane quite quickly.

So it might be a good idea to keep 25% of assets in bank deposits, 20% in property and 55% in equities. If your cash component is less than 25%, take some profits now.

Miraculous cure

THE best tonic, I have discovered, is a friendly call from the SA Revenue Service – and their compliance with a request.

You might remember, I had been laid very low by shocks started by the South African Revenue Service’s (Sars’) obtaining a judgement against me for R217 and, as a result, being marked “unclean” by Trans Union ITC and turned down as a credit risk by Vodacom,

I was supine on my sickbed when, amid the calls from morticians, worried life assurers and other sympathisers, one came through from Khalied Booley of the Cape Town office of Sars. His very name caused great foreboding.

“I read your story and my heart bled for you”, he laughed. Yes, laughed.

“Sorry,” he continued, “we can’t remove the record of the judgement against you because we followed due process. Never mind that the R217 you owed in 2004 was more than made up by the R10 000 we owed and paid you.”

“Thank you”, I croaked, and fell back against the pillow with a sigh.

Later the phone rang again. It was Booley with words to this effect: “Having reviewed our years of profitable trading with you and confirmed that your affairs are in order, we have decided to rescind the judgement against you. The record of the R217 judgement against your name at Trans Union ITC will be removed as soon as we have cleared it with the court.”

The healing was miraculous. I leapt out of bed and rushed down to Vodashop, Craighall Park.

“Please don’t throw away my unsuccessful application for a phone contract. Wait a week and re-submit, when my name will be cleared.”

I crossed the road and celebrated my return to health with a run and a swim.