Gold guru review
By: Tim Wood
Posted: 2003/05/15 Thu 19:01 EDT | © Mineweb 1997-2003
NEW YORK -- The first quarter of 2003 was jammed with gold price tickling news – all the way up to $385 per ounce and US Secretary of State Colin Powell’s premonitions-of-war impersonation at the United Nations on 5 February.
It was downhill from there to an intraday low just under $320 in early April before a reversal that closely fits the December 2002 take off toward $360 an ounce. At writing, gold has stabbed briefly above $356 but skidded back toward $350.
So it’s an opportune time to revisit what the gold gurus are saying about the metal and its prospects. What has been lost in geopolitics and mad dictators has been made up in a renewed attention on gold investment vehicles; primarily the excruciatingly slow-to-market World Gold Council exchange traded fund, the Equity Gold Trust [GLD] for which an S1 registration statement was filed with securities authorities on Tuesday. More on that later in a separate article.
This article profiles Andy Smith. Follow ups will include Martin Murenbeeld, CPM Group, Paul van Eeden, James Turk and the major international banks, all of which should be released over the next week or so.
Andy Smith – Mitsui Global Precious Metals, London
Forecast: Lo $310 – Avg $335 – Hi $385
Andy Smith’s hundred acre intellect has produced another precious metals market tour d’force that may leave gold bugs confused and grumpy.
Titled ‘Shock and Eeyore’, this A.A. Milne derivative sees short-term positives for gold in low interest rates; higher yielding investments than the American dollar; the gift of a handful to the many – producer dehedging; and lower central bank sales until the fourth quarter. He discounts the obsession with the apocalypse that so many keep thrusting upon America’s future.
Smith’s long range view is clouded by the continued decline in Indian, Chinese and European demand with rumbling noises in the once stalwart American jewellery market. There is also a boatload of fear to sniff out of central banks.
Dollar weakness
“In practice, the gold market seems to have usurped ‘dollar weakness’ as its own private correlation,” Smith writes wryly, noting that this habit comes from the metal having once been money. However, it’s performance as an alternative to the dollar is not as impressive or closely correlated as soybeans and platinum. Showing slightly lower correlations, but more impressive price appreciation, are cocoa and nickel.
Hmm. CocaGold might be a useful moniker for a new exchange traded fund sold through Starbucks. Or how about SoyGold for vegetarians?
Doom and gloom
Those unfamiliar with Winnie the Pooh (how could Disney have missed) may have a hard time following Smith’s analysis. In a nutshell, each character in the children’s series has a personality defect worthy of permanent institutionalisation or intravenous lithium. Eeyore is the centrepiece in Smith’s report; a mulish manic depressive donkey whose friends comprise an eating disordered bear, a demented tiger, an obsessive compulsive rabbit and a bipolar oedipal pig.
While the Eeyores of this world await the post 9-11 / Afghanistan / Iraq implosion to take gold to inglorious new heights, Smith says the true impact for the metal is not in its status as a refuge, but as an interest rate story.
The world’s gloom about threats real and imagined has stalled growth. As a result: “Shorting gold - whether you’re a forward-selling producer or futures market speculator - remains less fun than Pooh Sticks.” In other words, if the economics turn around and cause short-term interest rates to jump out of the free money regimen we are in, we are likely to see a return to the bad old days of sub-$300 gold.
“Gold is a bet against Bush. Now with longer odds.”
What Smith does not say, but which is worth noting, is that most gold bugs, at least of the American variety, have a strong affinity with the “paleo-conservative” position which is a libertarian-Pat Buchanan expression on foreign policy and sound money. Gold conspiracists line up behind the position more or less without knowing it and do, indeed, bet against President Bush (while beating about him too…).
Ekonomix
Smith’s economic priority is “shocking and awesome weakness outside America” rather than the hellfire sermons being dished out on US budget and trade deficits driven by rearming and tax cuts. It must be said that the tax cuts are a smidgen relative to the gamey pork that is redistributed by Washington, but we understand the political fuss which suggests that taxes returned to their owners are more harmful than those retained and spent by appropriation.
In reference to the dire predictions, Smith asks: “Watch out for the biggest fiscal Piglet in the world?”
“Evocative of the economic embers of the war-stretched Johnson presidency in 1968, and the monetary phoenix – gold – which eventually rose from them? Or is this Reagan Redux, when the US can feel good about itself again, and the dollar will show it? Those keeping score would note that US government debt swallows less than half GDP, Japan’s 150%, Italy’s 110%, Germany’s and France’s 60%+.
“Those stabling historical hobbyhorses might remember that balance of payments deficits can be a sign of health, of international capital seeking the best returns. Consider some of the more infamous cases of surpluses: the old Soviet Union and apartheid South Africa (in a capital market siege), and Japan and Euroland today (trapped in secular demographic strait jackets of surplus savings). And in Euroland’s case, suffering advanced sclerosis as it expands into a mini-UN with many of the trappings of its role model, uppermost a consensual constipation.”
Hedging
Is it possible that 2003 will see the resumption of producer hedging? Not because of the wistful contango, but perhaps because the “anti-hedging jihad” is about to smack into reality.
· “the brevity of the spike this year may have disabused many of the notion that producer hedge books carry very much incendiary, must-close-into-strength derivatives
· the underperformance of most gold equity indices [of all hedge hues] for almost a year
· the growing realisation that whatever the notional losses on hedge books in a rising gold market, these are blown away by the real money overpayments [aka ‘goodwill’] on the acquisitions which a rising gold market stimulates. One Canadian fund appears to get it: it “invests in profitable companies with good long term growth prospects, little or no debt and reasonable valuations. Few gold stocks fit the bill right now.”
With dehedging having contributed so much to the gold price so far, any abatement in its pace is worrisome. “If producers merely fail to renew hedges as they mature – a more open question the longer the drought between spot price spikes - the pace of de-hedging may halve this year.”
Investment
Smith is scathing of current fashions promoting gold investment, warning that the gold rally is “newspaper- and paper-thin”. There is a marked disconnect between paper gold and the physical stuff – the former is traded heavily, the latter in diminishing quantities into a progressively more illiquid market.
Despite a $100 makeover in a few short months and a tonne of new investment products, gold has proved uncompetitive against things like junk bond mutual funds that have absorbed $1.5 billion in new money each week. One week of junk bonds is worth all the money attracted by gold mutual funds since September 11, 2001.
Driving the point home: “So far this year junk bond funds have hooked over $17 billion, equivalent to 1500 tonnes of gold, more than all the Krugerrands sold in the 33 years of their existence. The flight to quality evidently profiles metallic objects.” Touché – all the libertarian hand-wringing has not made gold any more popular. Perhaps it is apposite to mention that the Libertarian Party presidential candidate in 2000, Harry Browne, got less votes than campaign dollars – 382,869 or six-sixteenths of the total.
Of course, hope will spring eternal in some breasts – if people can be persuaded to chase junk bonds, surely gold too? Apparently not. Smith also reminds readers that investment turns to disinvestment quite quickly, hence the central banks, key gold investors of yore, are now racing for the exits.
Central banks au revoir
Portugal’s gold sales have been a wild card that, says Smith, “wash out some cherished certainties” about official disposals. The negative results might be lower volatility, more competition to sell more first, an effort to emulate Portugal’s Washington Agreement end-run, confirmation that central banks are aggressively demonetizing gold.
Nevertheless, there is a window until the fourth quarter since only Switzerland is entitled to dispose of its gold in terms of the WAg. That should be 25 tonnes a month for the next five months. Of course, there are non WAg countries and Smith suspects that they opportunistically offloaded at $385. Nevertheless, he sees “optionality” risk reduced until October.
“Miners and funds now have a new date to hang a position on, something they seemed to lack once the diary-busting Iraq build up/war ended,” Smith says, adding: “Until the end of September the field is not only open, but tilted in their favour. Ouro obrigado, after all?”
Smith raises an ominous point about the Washington Agreement which is up for renewal a just over a year from now. Germany has made noises about not having a second agreement and so far no-one has made any particular effort to seal one up.
That has left South Africa to scurry again into international action to plead for a second four-year subsidy on one of its primary foreign exchange earners. There is an interesting diplomatic delicacy in play here.
South Africa made an ass of itself over Iraq, turning into a mini-me France and Germany – a hollow echo of the labour and welfare policies it imported from there. Indeed, South Africa’s entire foreign policy can be summed up and understood by gazing at a donkey’s backside.
The result is a bind – how to curry favour again with the Americans who can afford to sign a second Washington Agreement without offending the ideologically more appealing Europeans who are making opposite noises? It would be interesting to see how far France and Germany’s anguish for the downtrodden extends into their gold vaults. Meanwhile, the White House has not shied away from creating consequences, hence troops being removed from Germany and increasing attention on France’s systemic corruption and global irrelevance.
How much will South Africa regret its ruling party sponsored marches praising Bin Laden and the intemperate rallying of kith and kin to repel American Marines marching to Pretoria?
Back to Smith who notes a Euroland central banking identity crisis – the Bundesbank and others are unhappy that prospect of relegation to regional offices of the ECB. Meanwhile, the Bank for International Settlements has, by sleight of hand, swapped its gold franc with bastard money, Special Drawing Rights. And so it goes across the continent.
Then there is the China syndrome revisited – every time we check, China has substantially more gold than it previously reported and the gold has not been bought on market. While America has been reclassifying gold in one way, China has been at it another. “These accretions [coincidentally?] equal the 200 tonnes of “liquidity” the Peoples Bank promised the Shanghai Gold Exchange. There is more where that came from, awaiting re-definition.”
Your money and your life
"In the crude, semi-Soviet accounting terms that often pass for gold insight, it is arguable whether the most optimistic dreams of future ‘investment’ demand [from the most pessimistic nightmares of global fortunes] will ever outweigh the annual loss in physical demand and increased scrapping caused by higher prices. Not to mention the deadweight annual loss - come Hell or low prices - from the vaults of central banks, aka ‘long term’ investors. Buyers into price strength may be found, somewhere outside the mining and New York speculative communities, but their allegiance is dubious.”
The situation is worrying on a glance at this graph:
An Eeyore gloom is risked on reading that for people who treat gold exactly as a safe haven instrument – those under the capricious attention of sheiks and latter day sultans – quit gold in droves ahead of the Iraq war. Even the wily Saudis have bailed and the planning ministry says it is because of insecurity.
It is a point not to be glossed over since much store has been placed in the gold dinar and the supposed superior appetite for gold among Arabs and their Muslim brethren around the world (aka Malaysia's Mahathir bin Mohamad).
Meanwhile, one time gold stuffbag India doubled its scrapping last year to take advantage of higher prices, whilst in February illegal exports were being reported.
China, upon whom so much hope rests, has not delivered what was expected of its Shanghai Gold Exchange. Volumes are relatively tiny and dominated by the Central Bank; an inauspicious sign in China where the “street” has proved a lot more savvy than the mandarins who seek to control it.
“Consumer loans have increased forty times since 1998 to $100 billion [equivalent to 10,000 tonnes of gold not bought], and most of these are mortgages, funding China’s preferred safe havens, private homes,” notes Smith.
Then there is America where jewellery consumption is teetering. The lesson – go down-market in a way that rescues gold from its down market:
“One high-priced jewellery designer told the New York Times on 4 April: ‘the market is generally oversaturated with jewellery”. Her gold/enamelled necklaces sold through Bergdorf Goodman and Neiman Marcus for up to $22,000; her new venture is designing downmarket, for the TV sales channel QVC, in silver, with bracelets up to $121. They sold out in 50 minutes. Meanwhile, in the ultimate style counsel Italy, visitors to the Vicenza fair in January witnessed what global brands can do for gold jewellery. Since they manufacture mark up, they would rather promote jewellery in stainless steel, rubber, wood, or plastic.”
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