Franco-Nevada’s Lassonde: Buying By Central Banks One Of Key Shifts In Gold Market Over Last Decade
Posted 9/19/2011 17:15 PM by Allen Sykora
Montreal-- (Kitco News) -- Substantial changes have emerged in the gold market over the last decade, and some of the shifts are likely to continue for some time, the keynote speaker told the London Bullion Market Association on Monday.
Speaking at the LBMA’s annual conference in Montreal, Pierre Lassonde, chairman of Franco-Nevada Mining Corp., touched on the theme of “what a difference 10 years can make.”
The 2000 annual LBMA conference was a bit like going to church, including prayer, he joked. The metal was on the skids and was around $250 an ounce, while the Dow Jones Industrial Average was around 10,735 and not long before had topped 10,000 for the first time.
Flash forward to 211 and much has changed.
Take central banks. “They went from sellers to buyers,” Lassonde said.
In the 1990s, European central banks were selling gold at a time when the U.S. dollar, the world’s reserve currency, was far stronger. The lure of the dollar was great enough that central banks seemingly took the approach of “let’s get rid of that yellow stuff gathering dust. And they did,” Lassonde said. In 2000, central banks sold 479 metric tons.
Of course, those involved with the gold business know the rest of the story – gold increased several hundred percent since and topped $1,900 an ounce for the first time late this summer. As a result, based on $1,800 gold, these central banks lost out on some $220 billion, Lassonde said.
But in more recent times, central banks have become buyers again—only from emerging-market countries. Lassonde looks for this trend to continue.
“It is our view Asian central banks will move to a 15% weighting in gold at a minimum,” Lassonde said. If so, this would mean further purchases of some 17,000 metric tons, he said. Lassonde suggested these banks are likely to use price pullbacks as buying opportunities.
Another change: producer hedging is “dead as a doornail,” Lassonde said. The hedging peaked at some 3,000 metric tons in around 2000, but this has largely been unwound, in essence removing supply from the market, in part because investors wanted full exposure to the rising gold price.
Then came the surge in investment demand, including the advent of exchange-traded funds, which the keynote speaker called “the most remarkable development” of the last 10 years. In roughly 7 1/2 years, the ETFs have accumulated some 2,300 metric tons valued at more than $145 billion, Lassonde said.
Still, the portion of portfolios in precious metals remains low, although Lassonde expects this to continue to rise. Only 1% of global asset allocations are currently in gold, amounting to 31,100 metric tons, he told his audience. If this rose to 2%, it would mean purchases totaling another 31,000 metric tons at current prices, he says. “Inconceivable? I think it’s going to happen,” he said.
The share of gold demand linked to investment rose from 4% to 37% from 2000 to 2010, although conversely the share for jewelry fell from 85% to 50%. Some of the latter was in response to higher prices, although demand has remained strong in the key consuming nations of India and China despite recently higher prices, Lassonde said.
Another noteworthy development, he said, are research efforts to find new industrial and technological uses for gold, which he anticipates will eventually result in a “game-changer” for new demand. He noted that the World Gold Council has been helping fund various research efforts since around 2000. Since, the number of submitted research papers rose to 4,000 in 2010 from less than 500 in 2001. |
