Marcos. I had some not so random thought about this. It's a good thing to see majors still swallowing juniors. But....
Has anyone taken notice of the number of consolidations going on in the gold market? In the last few weeks we've seen the two top predators in the gold food chain swallow (or attempt to) multi-hundred million dollar meals. Barrick and Placer Dome are continuing to acquire…. Placer Dome in a really big way. A similar situation exists in the oil market, but it is the gold market that can is really remarkable. Why?
According to the World Gold Council, between 1970 and 1992 jewelry makers consumed 65% of all annual gold production. Industrial uses, including electronics and dentistry consumed another 20%, leaving approximately 15% of the total worldwide production to the financial markets. When someone uses the phrase "tail wag the dog" they may be discussing Clinton-like movies, or the fact that the price of gold is decided by buyers and sellers of 15% of the worlds production, the financial markets. What exactly constitutes the financial markets?
There is talk of the tremendous overhang in gold reserves in central banks. On examination, one realizes three critical points.
1. The Central Banks are the predominant source for bullion sold into the market as borrowings and hedges. This is gold that has been borrowed against or used as collateral, and is not available to be "dumped on the market"….it has already happened. Barrick, Placer Dome, and Newmont alone have forward sold through spot-deferred or future sales approximately 10 million ounces. It is not difficult to identify more than 50 million ounces "presold". Perhaps much more has been sold if one includes hedge funds in this analysis.
2. The total quantity of gold stored in central bank vaults is open for speculation, but estimates average around 1,000 million ounces (30,000 tonnes). This should be compared to the total quantity of gold traded in the financial markets on a given day. For example, the COMEX typically trades 3,000,000 to 4,000,000 ounces per day. If all of the Central Banks in the world dumped half of their available gold (exactly what is available?) into just the Comex, it would provide 100% of the sales for less than 2 quarters!
3. Central Banks must replace this reserve with something (perhaps US dollars or dollar-denominated debt). Generally governments have been notoriously incorrect in their decisions, since many are strongly influenced by political agendas. One must question the wisdom of selling an asset (gold) near its record low price (inflation adjusted) to buy an asset (US dollar) that is selling near its record high price.
What has happened in the past few decades? One other fascinating change to the gold market, is that by creating various options and futures related derivatives, the market has created a creature called synthetic gold. This is not some alchemist's dream, rather it is a central banker's nightmare. It has been around for ages, but has become very popular in the past few decades. By simultaneously selling a put (the right to sell at a fixed price for a fixed period) and buying a call option (the right to but at a fixed price for a fixed period), one can create a position that mimics a similar short-term holding in gold bullion. It can gain and lose a dollar for every dollar change in the price of gold bullion. Globally we have accomplished what governments whose monetary system was on the verge of collapse have done for ages….debased their currency, in this case, gold bullion. But we have done it in a manner that no chemist could detect. The creation of synthetic gold has expanded the quantity of gold in the world. Because it acts just like gold, it has displaced gold in many transactions, including central banks reserves. Synthetic gold is however, transitory. It can be rolled over, creating an illusion of permanence though. The gold in the central banker's vaults is no longer 24 carat…it has been debased many times through paper transactions. It is in reality only 18, or maybe 14 carat. Maybe less.
What inevitably happens is bad money replaces good. It has happened for thousands of years, yet every generation believes it is immune to the previous generation's problems. This time is different. New world order. No longer need a gold standard. We've learned from our mistakes. Bunk! The only thing we've learned is that polished up and repackaged, the "debase your currency scam" can fool all the people for a while.
The question now is, "what is good money?" I don't know, but the people that mine the stuff appear to be buying it up like it's going out of style, while the people that need it to support their lifestyle appear to be spending it in ever increasing quantities. The neatest thing is that the supply-demand equation is really skewed because "synthetic gold" has been added to the supply-side. I may not know what good money is, but I have an idea what bad money is.
Dave |
