Price of gold - From 2000

Today's chart provides some long-term perspective in regards to the gold market. As today's chart illustrates, gold has been in an extremely strong bull market since 2001. The pace of that upward trend has increased over time. There was a slight increase in slope both in 2001 and 2005. Following the financial crisis of late 2008, however, gold significantly increased the pace of its ascent. Recently, gold made new rally highs but has pulled back after approaching long-standing resistance (red line) of its current accelerated trend channel. Despite the pullback, gold currently trades for over six times what it did when the rally began back in 2001.

The Current Market Sell-off - by Coronation

The Current Market Sell-off

The ongoing sovereign debt problems of the Western world suddenly erupted into a full scale

panic in financial markets in the first week of August 2011.

The proverbial straw that finally broke the camel’s back was a combination of the problems

experienced in raising the US debt ceiling, the lack of a clear and strong enough policy

response to the Eurozone’s debt problems by the ECB and the EU, and the release of poor

economic indicators across a number of countries. Investors have lost confidence in the

authorities’ ability to support the recovery in the US and to deal with Europe’s funding issues.

In response there was a massive spike in risk aversion and indiscriminate selling of risk

assets. To top it all, rating agency Standard & Poor’s lowered the US’s credit rating from

AAA to AA+ - its first ever down-rating – adding further fuel to the fire and the extent of panic

selling.

South African equities and the rand weakened substantially as investors sold en-masse.

Safe haven plays like gold, the Swiss Franc and somewhat perversely even US treasuries

were the winners in this flight to perceived safety.

What can one expect now?

A far stronger policy response from, in particular, the EU and ECB is required. Large

countries such as Italy and Spain cannot be allowed to flirt with defaults on their bonds. If

such an event were allowed to happen it would deal a lethal blow to European banks and

may spell the end of the Euro. No matter how politically unpalatable it may be for the Italians,

Spaniards, Greeks and others, some form of greater fiscal union (or a mechanism forcing

increased fiscal accountability) in the Eurozone is likely to result from this crisis.

Coronation is in no position to predict what macro outcome will result - as events of the last

few years have taught us all that no-one can foretell what the future will bring. But what we

can say is that we will, as always, stick to our valuation based investment approach.

Preceding the crisis we found global equities to be reasonably attractively priced. We also

thought most global bonds were terribly expensive. The panic selling of good quality shares

has made the value in these stocks even more apparent, and the flight to US treasuries has

in our view only made an expensive asset even more expensive.

In the South African market the cyclical stocks such as Anglo American and BHP Billiton sold

off more aggressively than the defensive shares such as British American Tobacco and

SABMiller. The relative price moves were extreme and we used the opportunity to switch

from the defensive counters to the more cyclical ones.

We acknowledge that the loss of confidence in the ability of policymakers to steer the correct

course is a blow to growth prospects. And as commodity prices weaken, South Africa will

earn less for its exports and will run a higher current account deficit unless spending on

imports also declines.

The lower than expected economic growth does however mean interest rates will stay low for

even longer. A period of stagflation (stagnant growth combined with some inflation) is

becoming an ever greater probability for the globe and South Africa.

In such a scenario, negative real returns on cash and bonds are common. In previous

episodes of stagflation, equities proved to be the only asset class to give investors a real

return. We also remain very comfortable with our high holdings of inflation-linked bonds

across all our balanced and bond funds.

We are likewise pleased not to own conventional government bonds. Our equity holdings

have certainly suffered as prices collapsed but we view the sell-off as an opportunity to take

advantage of the compelling long-term opportunities that so often present themselves in

times of crisis.

Our funds have weathered the sell-off well so far, with price behaviour of all the funds in our

flagship unit trust range remaining comfortably within their respective risk budgets.

Karl Leinberger

Chief Investment Officer

Coronation

10 August 2011