Trevor Gerszt

Trevor Gerszt has been passionate about gold since childhood. Growing up in South Africa, the world’s second largest gold producer, Gerszt spent his youth collecting gold coins. Surrounded by a family of experienced coin collectors, he gained valuable insight about the precious metal.

1. Stocks are more profitable in the long run.

Which stocks? General Motors, maybe? True, that's a stock that has performed nicely this year. But need we remind you GM went bankrupt as recently as three years ago? If you don’t mind looking over your shoulder at the competitive Japanese car market and the labor problems that dogged GM for a long time, go ahead — take your chances.

Or did you mean Blockbuster, Inc.? How’d that one work out for you? Why pick and choose among paper investments when you can buy an investment which individuals and nations have depended on for thousands of years?

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By the time you read this, you will have begun celebrating Christmas with family or friends, and persuaded yourself that the world, as recently predicted, did not end.  Gold traders must have felt the same way because the yellow metal closed up $9.00 last Fridayat a price of $1,657.00 per ounce. 

Positive U.S. data and thin trading have had a negative effect on gold prices in the last several days.  Gold closed below the 200-day moving average and prompted investors to sell off their positions.  The Bureau of Economic Analysis (BEA) reports that third quarter GDP growth was revised upward from 3.1%, bettering its previous estimate of 2.7%.  To make matters more difficult for the gold price, BEA also reported a better-than-expected third-quarter number for personal consumption at a 1.4% increase as opposed to its previous estimate of 1.4%.  The National Association of Realtors also weighed in with a better-than-expected number for the sale of previously owned homes. 

Positive-Pullback

With U.S. fiscal-cliff difficulties and highly publicized reports of quantitative easing, world economies have come to be more and more dependent on U.S. economic data.  So it doesn’t surprise us at all that there would be a hiatus in gold’s climb towards the $1,800 level.

But reports from the official sector suggest that once the holiday calm eases, we could see a renewed bull market.  Reports are now in that Russia just purchased 2.9 metric tons of gold, Brazil 14.7 metric tons and; in a bit of a surprise, Iraq wound up purchasing 25.2 metric tons.  The World Gold Council reports that the Iraq purchase represents its first significant gold purchase since the early 2000s.  As UBS suggests in its Precious Metals Daily, “having a new buyer in the central bank space and especially from a new region is an important development.”  So while positive economic data seems to bode poorly for the yellow metal, we should consider what’s happening behind the scenes.  But nothing has changed enough to justify a revision of our robust gold prediction for 2013.

Keep in mind too that the strength of gold traditionally oscillates inversely with the strength of the dollar.  In a December 21st article in its business section, the New York Times makes the point that, with unemployment at 9 percent, both the Obama administration and Fed Chairman Ben Bernanke actually welcome a cheaper dollar to encourage exports and to prompt manufacturers in the U.S. to hire more robustly.  Not that Obama and Bernanke are gold bugs – far from it – but if they get they’re underpublicized wish for a decline in the dollar, this is certain to be good news for gold.

Also, when traders return after the holidays, they’ll have a better handle on fiscal cliff developments.  Even if the Administration and Congress drop the ball on fiscal cliff discussions for the rest of this year, they’re going to have to do something come the beginning of the new year.  Whatever they decide, we’re almost certain to have an increase in taxes – an increase that, of necessity, will result in reduced consumer spending.  A reduction in consumer spending in turn will result in a downturn in the economy.  Need we add that with a downturn in the economy, our Fed Chairman will consider it his virtual patriotic duty to speed up the printing presses? As soon as this happens, Ben Bernanke is sure to get his wish for a cheaper dollar. But if you act shrewdly and strategically right now, you can get your Christmas wish for a winter white sale on gold.

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As we move closer to the end of 2013, and official fiscal-cliff argument toggles back and forth, it’s all too easy to sink into despair. Particularly if you’re a precious metals investor.  What in the world happened to gold predictions of $1,800 by the end of this year?  And what in blazes became of silver predictions surpassing the all-time high of $52 per ounce reached in 1979?  Are precious metals about to tank?

We need to step back and look at the total picture.  In doing so, as recently as a month ago, analyst Jeff Clark offered a graph of the gold price vs. an adjusted monetary base.  His conclusion?  He’s not at all deterred by a short-term consolidation.  His gold prediction for the end by year-end 2014 logs in at $2,500 per ounce.  Given gold’s current tendency to tightly cling to the low $1,700 level, Clark’s gold prediction makes classic sense.

Positive-Pullback

His reasoning is that as long as the Fed sustains quantitative easing “through eternity,” continued printing of money puts an upward pressure on gold prices.  Clark observes further that as prices rise and attract many more investors, supplies will become limited, thus driving up prices even further.  Premiums on coins, he also mentions, tend to rise at times like this. 

Since the great mass of investors waits until prices move very high before buying, others will crowd into the market like sheep, concludes Clark.  “The average investor won’t want to be left behind,” he reasons.  This kind of behavior is generally true of investing in general.  The dot.com mania of the 1990s is a good example.  People rush into a market based on rumor and saturated media coverage.

Peter Krauth, the global resources specialist for Money Morning, is even more ambitious about his silver predictions.  He bases them on a common pattern that’s evident in the relationship between gold and silver.  Although silver moves “almost in sync with gold,” it does so dramatically.  Krauth sees silver as “gold on steroids.”  Consequently, he predicts that the gold/silver ratio will move to 20 in the long term.  Today the ratio of gold-to-silver runs about 52.68.  A move to 20 would suggest silver will move up much faster than gold.  So if gold indeed goes to $2,400 per ounce in 2014, look for silver to move to $120.00 per ounce.

Given this background, we interpret the sluggishness of gold and silver prices as a bullish sign.  Metals have not tanked at al.  Gold and silver are holding their support levels.  This suggests that investors are watching and waiting.  Some may, as UBS suggests, be looking for a better deal.

If you’ll forgive us the play on words, everything now hangs on the fiscal-cliff discussions.  The fundamentals remain in place.  So do not short-change your own gold and silver predictions. Once again we stress, don’t wait to buy.  Better to buy and wait.  Beat the herd.  The precious metals bull market is far from over.

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Isn’t it always the case?  The price of gold dips, and investors new to the yellow metal begin panicking. And media pundits begin moaning that it’s all over for gold. Seasoned gold investors know better though.  True to form in the last few days, gold took quite a dip, flirting with a downward slide to the 1600s on the exit of longs and an increase in short positions.  Yet here we are after a quick turnaround late Friday and a healthy follow-through today.  And here gold sits at $1,713, up $9.00 per ounce.

What in Sam Hill happened?  Well, for one thing, the economic community is anticipating Ben Bernanke’s announcement of continued quantitative easing at The Fed’s FOMC meeting this Wednesday.  This anticipation is based less on inside information than on the widespread assumption that The Fed Chairman doesn’t want to be the bad guy to slow down the economy just in case President Obama and House Speaker John Boehner finally come up with optimistic news during fierce fiscal-cliff battle.

So it seems reasonable to expect an announcement this week that the dollar printing presses will be alive, well and turned back on at full speed.  What’s particularly significant is that the announcement of an improvement in the nation’s employment numbers didn’t suppress the gold market back for a second.  Total nonfarm payrolls rose by 146,000 jobs in November.  From Ben Bernanke’s past comments, we can safely infer that this number is insufficient for The Fed to put a stop to quantitative easing.

Positive-Pullback

To compound the difficulty, the country is now undergoing a dramatic drop in its consumer spending.  This is particularly bad news during the final quarter – news that certainly won’t be lost on The Federal Reserve FOMC when it convenes Wednesday.  Meanwhile, while we hold out for optimistic news from the hill on fiscal cliff negotiations, an article in yesterday’s Wall Street Journal suggests we might not want to hold our breath:

“Democrats say they are waiting for Republicans to agree to raise tax rate on the highest-earning households, and Republicans say they are waiting for Democrats to agree to cuts in safety-net programs.”

All of this economic uncertainty is definitely encouraging news for gold.  Particularly in the wake of increased gold buying by central banks, observant investors are fast becoming persuaded that the economy is far from entering a recovery mode.

Under the circumstances, it’s time for you to look at your own portfolio. You’ve seen where gold’s been, and you know where it can go.  Don’t bet against an $1,800 price per ounce in the next several weeks.  Time to start accumulating.

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After another energetic climb to the upside, gold backed down last week.  Much of this downside trading, as we’ve suggested, had to do with fiscal-cliff uncertainty.  Gold responded to the confusion by clinging to the low 1700s.  Today, precious metals remain slightly above this level with gold up $2.00 at $1,715 and silver up $.21 at $33.65.And if gold winds up making small moves back and forth all this week, the in-place two-step is sheer mimicry of the stalemate between either side of the aisle.

Like school children arguing over who’s out in a game of tag, each party blamed the other for the holdup.  House Speaker claimed the administration refuses to come up with substantial spending cuts, while Senate Democratic leader Harry Reid said of Boehner “I don’t understand his brain."

Positive-Pullback

Meanwhile $530 billion in tax increases and spending cuts hang in the balance.  Once it becomes clear what the plan is, the economy will respond appropriately.  If the President gets his way and we wind up with increased taxes, the economy will slow down.  If the economy slows down and – worse – we’re thrown into another recession, the Fed will continue with quantitative easing.  If the Fed continues with quantitative easing, look for gold to move much higher soon.

But, even if gold winds up with a quiet week, look for other influences to assert themselves in the market.  A report from The Institute for Supply Management (ISM), as reported in Reuters today, said that “its index of national factory activity fell to 49.5 in November from 51.7 the month before.”

This reduction amounts to the lowest level of factory activity in three years.  It’s clear that companies are waiting to see what happens in Congress with respect to taxation.  Under the circumstances, it’s fair to say that the yellow metal is also biding its time.
While a slight increase in construction spending is encouraging, ISM indexes also reflect weakness in exports and employment.  But we’ll know more about employment this week when the US non-farm payroll figures are released on Friday.  The consensus of professional opinion is that the country will expect a decline from 171,000 new jobs to 100,000.  Because of how Hurricane Sandy figures in the mix, exactly what those numbers mean will not be clear. We will also know about rate decisions from some of the larger central banks including, Canada, England and Australia.

In the meantime, look for gold to range trade this week between $1,715 and $1,750.  Again, we emphasize that these are excellent prices at which first-time buyers or seasoned investors can accumulate.  There is no reason to delay purchasing until the fiscal cliff issue is resolved.  The underlying problems have been plaguing our economy for years.  Even in a last-minute show of love and understanding on both sides, all the king’s horses and all the king’s men will fail to put humpty back together again.  Gold at a very high price very soon will be the inevitable consequence of this failure.

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At the Very Edge of the Fiscal Cliff

Friday, 30 November 2012
Published in From The CEO

Politics is the art of looking for trouble, finding it everywhere, diagnosing it incorrectly
and applying the wrong remedies. - Groucho Marx

It’s like a stormy marriage, this fiscal-cliff negotiation. Isn’t it?On again, off again, on again, off again.  Immediately after every session, each party throws up his hands, and rushes to vindicate himself with the media like a sullen spouse making his desperatecase to a marriage counselor.  Of course the difference is in this case you and I happen to be the marriage counselor.  But, unlike a real marriage counselor, you and I have absolutely no say in the matter.  Zero, nada … zilch.

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And need I add that Congress and The White House are arguing over your money and mine? It’s of course disheartening to seesenators John Boehner and Harry Reid acting out the blame game in public.   I bring up this subject in the Investor’s Corner because ultimately (and I mean sooner rather than later) the way in which our leaders resolve this issue has immense ramifications for the price of gold.

We would do well to read the speech which ex-Fed Chairman Paul Volcker gave at the Cooper Union for the Advancement of Science and Art in New York City earlier this year.  You can catch a sizable excerpt of the speech in the December 6 issue of The New York Review of Books.  In case you’ve forgotten or are too young to remember, Paul Volcker is the Fed Chairman who preceded Alan Greenspan. Appointed by Jimmy Carter, and then re-appointed to a second term by Ronald Reagan, Volcker is credited by many of his colleagues for driving down the high rates of inflation that dogged this country during the 1970s and early 1980s

At this stage of his esteemed career, Volcker can be the true elder statesman.  With no longer any ties to a particular administration, he can speak as an independent economist.  Any optimism he retains is tempered by his dismay with how the U.S. government has handled budget problems and with his take on the appalling facts:

“…Hard as it is to contemplate, federal revenue today covers little more than 60 percent of expenditures.  That’s something that historically has happened only during a big war, never in relative peace, or even in limited wars.   Spending has climbed well above past levels, at one point rising from the previous 20 percent or so of GDP to around 25 percent. In the midst of recession, revenues fell to 15 percent of GDP.  Even with economic recovery, the remaining deficits will be far larger than we can finance from our own savings.”

Alarming, isn’t it?  No matter how the fiscal cliff negotiations wind up this year, you would have to have been hiding under a rock if you can even imagine that we won’t be in for increases taxes come January.   And once we undergo an increased tax burden, the economy will automatically slow down.  One can also predict that Fed Chairman Bernanke will feel honor-bound to print more money since he doesn’t want to be saddled with any blame for a recession.

Once the dominos fall and the printing presses begin cranking, gold will be off to the races for a robust year 13 of an exciting bull market.  The question is can you – will you – buy gold at the current low price?

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Gold Interrupted

Wednesday, 28 November 2012
Published in From The CEO

Gold dropped a whopping $23.00 today, closing out the trading day at $1,720 per ounce.  Silver, taking its cue from its yellow metal big sister, lost $.28 and wound up at $33.73 per ounce.  Two possible causes have been put forth for this distinctly unglamorous day for precious metals.The first cause has been attributed to the usual (and most current) suspect – the so-called fiscal cliff. The second cause is probably a red herring.  For today at least, it’s been named “the fat-finger” trade.  Let’s look at both of these mysterious explanations for what happened today.

According to the first explanation, once House Speaker Boehner announced that a deal on taxes and spending cuts was in the cards, and the stock market responded with a 20 point revival from its low point, gold once again had its work cut out for it.

Positive-Pullback

Don’t get me wrong.  It’s not that gold thrives on trouble.  But traditional gold investors view the economy with a much more jaundiced eye.  To them, any fiscal-cliff compromise at this point is strictly a cut-and-paste affair rather than a long-term fix. From the point of view of Wall Street though, even if the U.S. economy “falls off” the cliff at the end of the year, The President and Congress can still come back in January and fix it.  

The problem with this short-term fix is that it’s short-sighted.  In February of next year, the U.S. will hit its $16.4 Trillion debt ceiling as it did in August of last year.  According to former Congressional Budget DirectorAlice Rivlin, the postponement of a difficult budget decision amounts to Washington’s “kicking the can down the road.”

As things now stand then, we believe that gold has already factored this premature optimism into the market.  It’s unlikely that those holding a long gold position would cut and run over a simple offhand remark by The Speaker of The House.  Besides, according to an article in today’s Wall Street Journal, the Federal Reserve has been regularly sending out signals to keep up its bond buying well into next year.  Gold traders know the implications this program holds for the economy at large.  Today’s drop in price does not reflect negatively on gold’s potential as the new safe haven.

Nor are we buying into  the fat-finger-trade explanation.  Briefly, this refers to the possible mistake made by a trader – an act of ineptness, if you will, to try and short-sell gold and trigger buy stops at, say, $1,730 and below to harvest a windfall.  We accept the simplest explanation -- the one put forth by HSBC precious metals analyst Jim Steel.  Gold prices dropped because of the sell-off of the December futures contract at the opening of the Comex.  “The sell-off occurred as longs are rolling over from the soon-to-expire December contract to the February and other contracts.”

What we witnessed this morning then was a technical drop in the market that has nothing to do with the durability of gold.  It remains resilient for the long term.  Higher prices loom.  And $1,800 per ounce gold is on the near horizon.

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Is Gold Percolating or Just Stalling?

Monday, 26 November 2012
Published in From The CEO

Thanksgiving was a week of confusion for gold.  It range traded between $1,712 per ounce and $1,752 per ounce on mostly technical activity.  Yet uncertainty related to the U.S. fiscal-cliff discussions seems to have made November the strongest month of gold purchases since last January at the U.S. Mint.  It reports sales of 56, 000oz of gold and 2,265,500oz of silver so far.

Still, the yellow metal will have to take out the next resistance level of $1,780 for professional analysts to become really excited.  And, according to UBS Investment Research, much hinges on the “longevity” of those investors who initiated long positions on Friday.  As you might expect, those who buy on dips can also significantly influence gold’s ability to take out the next resistance level.

Positive-Pullback

UBS keenly observes, for all the uncertainty surrounding the market, investors are still not pessimistic enough to short gold. We would be wise then to view this current uncertainty as consolidation – or what I like to call percolating. Since last week’s trading was thin, it’s notable that gold’s price level hasn’t dropped considerably.  HSBC precious metals analyst Jim Steel observes that tomorrow’s expiration of the December options contract on COMEX most likely represents a positive force for the gold price.

Other forces also hum in the not-too-deep background. Disagreement on whether to provide additional for Greece could lend support to precious metals prices.  News too from the International Monetary Fund would also suggest that the gold price is percolating.  IMF reports that the Central Banks of the emerging markets purchased 40 metric tons of gold last month.  Brazil’s share of this amounted to 43% which, according to Heraeus Precious Metals Group, places the South American country’s gold reserves at its highest level since January 2001.

Keep in mind too what we discussed in our last Investor’s Corner column:  hedge fund managers George Soros and John Paulson have increased their funds’ shares of gold. 

Another strong sign for gold is the performance of silver.  Last week the price of silver moved up from $32.34 per ounce to $34.10 per ounce, bringing the gold/silver ratio to 51.30.  As I’ve mentioned in a past column, during a gold bull market, silver will invariably outperform gold.

And just today, in a Bloomberg interview, Blackrock Portfolio manager Catherine Raw reminds us that the open-ended nature of quantitative easing and continued low interest rates are just taking hold, making the bullish case for gold more obvious.  To those who would argue that inflation will move slowly here in the United States, Raw reminds us that the forces driving gold are global.

Need we add that returns on bonds are now abysmal?  As I’ve previously noted, bonds have acted as the gold’s most conspicuous safe-haven competitor.  Once the fiscal-cliff distraction is behind us and investors get the point that interest rates aren’t climbing higher anytime soon, gold will become the more appealing safe haven.  With all this evidence before us, it would be safe to say that the price of gold is now percolating. 

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Gold moves up in price. George Soros buys.

Friday, 23 November 2012
Published in From The CEO

As we dive into the Thanksgiving holiday and the dollar slips, gold has pushed up to $1,752 per ounce.  The taking out of the 50-day moving average has proved a game-changer for the yellow metal. But the even bigger news – news that should provide guidance if not consolation for the average investor – is that George Soros has stepped up to the plate with a 1.32 million share increase of his investment in The SPDR Gold Trust.  “Soros Fund Management LLC increased its holdings by 49 percent in the third quarter, U.S. Securities and Exchange Commission filings show,” according to a November 20th article in Bloomberg.

The billionaire’s love for gold is well known.  He’s remained one of the most visible defenders of a return to a gold standard for the world economy.  Bloomberghas also noted that gold prices have moved up 60% since January 10, 2010, the day Soros negatively referred to gold as the “ultimate asset bubble,” and has now publicly returned to his traditional contention in favor of the yellow metal.

Positive-Pullback

In case you feel singularly unimpressed by the Soros purchase, you should consider the argument Vedran Vuk made a few days ago in The Casey Newsletter.  His article is provocatively entitled Even if Gold Is Stupid, It’s Still Smart.  Vuk’s point is that we don’t have to want to buy the products of every company in which we think it’s worthwhile to invest. The fact that many people have continued to invest in gold for thousands of years should be sufficient enough reason for our wanting to invest in it. 

Vuk, in other words, takes the contrary position to the inherent-value argument for owning gold.  In other words, the only thing that gives anything its value is the value it holds for others.  So if central banks of the world and big investors are driving up the price of gold, then we should consider gold as an appreciating asset for our own portfolios.

Vuk’s argument cannot be easily discounted.According to the November 20th Bloomberg piece, Gold moved up 11 % to $1,728.85 in London this year, and is therefore earmarked for its “12th consecutive annual gain.  This time line represents the longest period of data kept by Bloomberg since 1920.

Now consider the investment strategy of John Paulson.  He reaped billions by betting against the subprime mortgage market.  Now he owns 21.8 million shares in the SPDR Gold Tust, and, according to a November 15 SEC filing, is now its biggest shareholder.  In the second quarter of this year, he increased his trust ownership by 26 percent to about 66 tons, and now holds gold reserves larger than Brazil, Bulgaria or Bolivia.

No one is trying to make the argument that we should blindly follow what others do.  We should always look at the fundamentals and technicals behind any investment we make, and then make sure there’s sufficient volume to drive up that stock or commodity.  A look at the volume of gold now held by George Soros and John Paulson should provide sufficient reason for us to hold physical gold in our own portfolios.

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Bernanke Speaks. Time for Us to Listen.

Wednesday, 21 November 2012
Published in From The CEO

Yesterday, Fed Chairman Ben Bernanke delivered a speech at the venerable Economic Club of New York.  In case you don’t know what that 105-year-old club is or why it’s so venerable, know that its members are high profile executives from business, industry and finance.  The sole purpose of the club is to promote discussion about the important economic issues of the day.  And who better to promote that kind of discussion than Ben Bernanke?

While the Fed chief’s remarks, on the face of it,seemed like platitudes of interest solely to a lunch bunch of economists, they are as significant an influence on the price of gold as most Federal Reserve FOMC meetings. Bernanke, first of all, issued a warning about the infamous fiscal cliff (a phrase he popularized), the series of tax increases and spending cuts facing the nation beginning January 1st of next year.  Unless Congress raises the debt ceiling, said Bernanke, the country will of necessity default on The U.S. Treasury debt.

Positive-Pullback

While this is no longer news, Bernanke’s mere mention of the debt crisis this close to year end is like a slap with a wet towel.  While gold has been range-bound trading back and forth in the low 1700s, a break out to the upside, regardless of what happens with the fiscal cliff, seems inevitable.  If you hold government bonds, certainly you’ve had second thoughts about the “safe” in the traditional use of the phrase “safe haven” about your investment.  When the inherent fragility of treasury bonds dawns on the American public, what do you envision will happen to gold?

An even more upsetting highlight of the Economic Club Luncheon occurred during the question-answer session right after Bernanke’s speech when he was asked whether the Fed might soften the blow of the fiscal cliff.  The Fed Chairman’s answer to the question?

“In the worst-case scenario where the economy goes off the broad fiscal cliff … I don’t think the Fed has the tools to offset that.”

Imagine that!  Here we sit in the midst of a third round of quantitative easing, a little more than one month away from the dreaded fiscal cliff; and The Chairman of The Federal Reserve publicly admits that the institution will be virtually powerless should our worst financial nightmare turn into a reality.

The Fed is not sitting back on its haunches though. The minutes of its last policy meeting hint at a December program of bond buying in an attempt to lower long-term rates.  This new round of purchases would replace a round of bond buying due to expire on December 31st.

In his speech, owning up to the nation’s fiscal sluggishness and its continued vulnerability to recession, Bernanke pointed to a number of economic weak spots:

  • As we mentioned in our last column here in the Investor’s Corner, companies have spent less on machinery, software and other goods, thus lessening new production capacity.
  • Entrepreneurs have been deterred from starting new companies due to stricter lending rules.
  • Unemployment, at close to 7.9%, remains disturbingly high.

Keep in mind that the Fed initiated quantitative easing to help change all this. As citizens, we’re unable to change anything in time.  We’re fresh out of votes, or say in the matter.  As investors though, we can protect ourselves.  The current economic malaise is a virtual soup in which the price of gold now simmers.  We would do well to interpret Bernanke’s speech as handwriting on the wall.  Your purchase of physical gold now, at least with respect to your own portfolio, will help put the “safe” back in “safe haven.

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