August 12, 2000. Guest Editorial: Letter to Central Bankers from Murray Pollitt
[Note: Murray H. Pollitt, P. Eng., is a Canadian broker and mining engineer long active in both the investment and
operational sides of the gold mining industry. Recently he penned an open letter to the world's central bankers. So that
the letter might be shared with a wider audience, Mr. Pollitt has given The Golden Sextant permission to publish it.]
The following is a message I would love to see conveyed to Central Bankers. Whether they like gold or don't like gold
doesn't matter. Whether they care or don't care about the mining industry doesn't matter. Nor should it matter whether
gold is still money, or just a commodity, or both. Nor should it matter whether bond traders, economists, bankers,
policy makers and news services constantly quote the gold price. Chacun à son goût.
What does matter is that Central Bankers do not want a repeat of the 1970's and the runaway gold prices that
characterized that decade. Whether they have a lot of gold, or no gold at all, Central Bankers do not want to see gold
double or triple; it would convey a disconcerting message and it would have scary implications for any commercial
banks which might be short the gold market.
Yet as a direct consequence of their activity in the gold market, some Central Banks have set the stage for another gold
price explosion. For the past decade they have been selling and/or lending 20 million (or more) ounces a year. [All gold
lent to commercial banks is then sold.] Enough to satisfy the gap between consumption and production, and enough to
keep the gold price in a deflationary trajectory. This quantity of gold, when related to annual mine production of 80
million ounces, represents a 25% imbalance in the supply/demand equilibrium, a staggering number, and its impact has
been visible and painful. But, importantly, the market has absorbed every last ounce.
The terrible gold price has crippled the gold mining industry. First, exploration activity has dried up, and now mine
production is, finally, falling. One can only high-grade most mines for so long. Gold mines are currently chewing
through 80 million ounces of reserves every year and, in our view, there is no way they are replacing even a quarter of
this amount. The only way big companies get bigger is by way of acquisition. Real growth, such as Anglo American's
project on Western Ultra Deep Levels, appears to be on hold, and Placer Dome's Las Christinas project (which
represented a quarter of that company's reserves two years ago) has been written off. There are many other examples,
and at the recent Financial Times Gold Conference, industry spokesmen made reference to the need to significantly
revise (i.e. lower) ore reserves should the gold price remain mired at current levels.
In gold mining the leads and lags between cause and effect are lengthy, say five to ten years. In the decade of the 1970's
global gold production actually fell 20% even while the gold price multiplied fifteen fold, a direct result of the
debilitating economic conditions the industry experienced during the final years of the Gold Pool and the $35 era. And
in the past two decades gold production more than doubled, a direct result of the price rise in the 1970's.
Once again, however, we are at a turning point and the debilitating conditions (costs, prices, margins if any) evident at
the end of the $35 era have returned. The gold mining industry is sick and production in year 2000 will be down for
the first time in many years. It won't be the last. Regardless of the price, annual production now appears destined to
decline inexorably; it wouldn't surprise us to see it down by 10 million ounces (that's 12%) five years hence. Even more
ominously, industry reserves are falling because of 1) the near cessation of exploration and 2) the reclassification
(declassification?) of reserves brought on by the poor prices. Even with a sharp, sustained increase in the gold price, it
would probably require at least five years to rekindle exploration and to begin to reverse the downtrend now under way.
And without a sharp, sustained price increase, the gold mining industry will become progressively paralyzed.
Given this scenario, and given that there is a significant gap (20 million or more ounces annually) between mine
production and physical consumption of gold, and given that this gap has been satisfied for more than a decade by ever
increasing supplies from Central Banks (even while mine production was rising), what will happen as consumption
continues to climb and production falls? Will the gap be 30 million ounces a year? Will it grow to 40 million? 50
million? Where will it be five years hence? Could the gap reach 60 million ounces? And where will the gold come from
to meet the demand created by winding down mine hedge positions?
For how long will Central Bankers be willing, or able, to keep filling this gap? How much more can they, should they,
provide? Contrary to popular propaganda, their reserves are not infinite; of total "official" reserves of a billion ounces,
probably 200 million ounces have already been lent and at least 400 million ounces are supposed to be frozen. Gold
may or may not still be money, but if one takes all the gold in all the Central Banks in all the world and multiplies by
$280, the total is less than one year's US trade deficit. Western Central Banks are not going down to zero gold.
Ideologically some Central Banks want to keep a lid on the gold price, and others are anxious to help some commercial
banks "defend" their short positions, but inevitably the day will come when they will be unable to stop the market. Then
what?
The amazing thing is that Central Bankers have an interest in monetary stability that should transcend their support for
speculators. An out-of-control gold price is presumably not part of the agenda, yet to go on anchoring it at levels that
ensure the destruction of much of the gold mining industry guarantees crazy prices later; the lessons of the Gold Pool
era ought to be clear enough. If gold has to be anchored, let it be at a price that permits the industry to survive, since the
only real long-term defense against runaway gold prices is a healthy, expanding mining industry. There is nothing
secret about the numbers cited above; with the passage of time these realities will become an ever more open book.
Surely the time has arrived for Central Bankers to review their gold lending policies while they still have some gold left.
Even if they don't like the stuff now, they may need it later. |
