Funds take some blame for gold's movements
Everybody who is anybody in the gold industry was at the 21st annual FT World Gold Conference in Barcelona this week. JULIE WALKER reports
JESSICA Cross, a highly respected voice in the global gold market, chaired the last session of the Financial Times 21st World Gold Conference and closed it on a more positive note than was possible a year earlier: she expects another tough 18 months or so but thereafter, she can see prospects for improvement.
A South African, Cross runs her own consultancies, Crosswords Research and Consulting and the Internet-based Virtual Gold commentary and database. She introduced the session with some research on "funds" - oft quoted as responsible for short or medium-term movements in the gold price.
When it comes to explanations of gold events, funds have often replaced the Russians, the Middle Easterners, producer hedging and the official sector as likely culprits.
Cross looked at 1 257 trading entities - 725 hedge funds, 314 commodity trading advisors (CTAs) and 218 funds of funds collectively managing $185-billion and relying on computer-generated trading strategies. She concluded profits in the funds business were just as hard-earned as in any industry - 83% of the money under management made returns of between 10% and 25% a year and only 0.5% doubled.
However, on the weight-of-money and collective activity grounds, the funds have large potential to influence comparatively small markets such as gold.
Greg Newton, president of the publishing group Managed Account Reports Inc, endorsed Cross's last comment, saying perhaps fewer than 10% of hedge funds were in gold.
His view is that whatever the funds buy has to make a big difference, and because there are too many unknowns in the market, funds are unlikely to go for gold at present. Newton says gold's lack of price volatility and supply uncertainties on central-bank holdings count against it (this echoes the sentiments of investment house Goldman Sachs given at a private dinner: gold is an acronym for "guaranteed oversupply, limited dishoarding").
Central banks came under attack from several producers, among them JCI Gold's Brett Kebble and Placer Dome's John Willson.
Kebble questions why central banks perpetuate the gold contango by lending the metal to producers and even backers of projects such as railways at lease rates of 1% to 1.5%.
This gold is sold and the proceeds applied to higher-yielding, interest-earning securities. Such market participants are "eternally grateful to the central banks for their largesse", according to Kebble, who says it is "a strange quirk of commerce . . . shareholders would have a lot to say if a company lent out high-value assets at low interest rates". He knocks the central banks for their shroud of secrecy and lack of transparency: in his view gold could be 15% higher if lease rates of 5% to 6% were applied.
Willson made a similar point: central banks earned perhaps $1-billion from lending gold, but the value of their gold holdings had been lowered by $100-billion as a consequence. "The major factor contributing to the decline of gold's purchasing power has been the mobilisation of western central bank gold reserves through gold lending since the early 1980s."
While conceding net central-bank sales have had a minimal impact on the gold price, "past central-bank gold sales have been disclosed without regard for the impact on market sentiment".
Despite Cross's exhortations, none of the central bankers among the delegates rebutted the accusations.
Central bankers delivered the first two papers of the conference. Luis Linde, director general of the Bank of Spain's foreign department, speaks of more active management of gold by the coming European central bank and the national central banks, "obviously a compromise between not holding gold and holding unproductive gold . . . normalising gold's position in the balance sheet, treating it as just one more risk asset and not as a store of wealth linked to the credibility or prestige of the monetary authority".
Linde notes that great progress has been made on transparency in the past 10 years, such as publishing the interest rate on gold swaps and the lease rate on lending gold, but there is still no public reference to the rates each counterparty is prepared to pay for gold deposits. "It is true that these rates can be calculated from the lease rate, but, perhaps, a direct contribution from operators could make the loan market even more transparent."
Rudolf Trink, head of treasury strategy at the Austrian National Bank, spoke on gold and the Euro (the new European currency), admitting the factors "are not really providing strong arguments for central banks to hold gold. However . . . central banks have the primary objective of ensuring monetary stability.
"In order to succeed, credibility in the public eye is indispensable. There is no doubt a certain portion of gold is adding to this credibility and it is under this aspect I expect central bank gold holdings will play a somewhat different but nevertheless very important role in the new European System of Central Banks environment. After all, history shows currencies came and went but gold always remained."
It would have been interesting to discuss whether gold will be quoted in Euros, and how the value-added tax on gold of the member countries will be dealt with: in some countries tax is zero and in others as much as 17.5%.
Meanwhile, gold producers presented their efforts to reduce the production cost of gold in a section entitled "Mining: Facing up to the price", chaired by Anglogold's Bobby Godsell.
They mostly strived for excellence, supported hedging as a defence mechanism and worked on improvements in productivity.
Godsell attributes Anglogold's reduction in cash costs from $295/oz 15 months ago to $250/oz to enhanced technology, skills development and new job structures.
Emphasis is on growth and entrepreneurial marketing, and top companies "will survive the current low price scenario . . . set fair for the day when the bull market returns, as return it must".
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