Gold statistics a little tarnished, say critics
The Gold Fields Mineral Services' Gold Survey 1999 came in for a bit of a smelting from gold-market watchers, writes JULIE WALKER
PAUL Walker, co-researcher and presenter of Gold Fields Mineral Services' Gold Survey 1999, started on the defensive when presenting the survey to a Johannesburg audience last week. Other gold-market watchers found fault with several of the survey's key aspects, such as central bank sales, investment offtake and hedging.
Walker was on the back foot on two more counts: the purchase price of £195 a copy was more than many of the audience could justify, particularly members of the press, in spite of his reassurance that the price was well below production costs and still reasonably priced.
The survey is supported by 20 corporate sponsors who were believed to have contributed $7 500 apiece, following the collapse of former owner Gold Fields of South Africa and the door being shown by Gold Fields Ltd.
The London audience reportedly had to pay £48 just to hear the presentation while Standard Corporate & Merchant Bank's hosting of the Johannesburg bash turned out not to be such a free lunch after all: a fire in the adjacent room put paid to Walker's slide show.
The survey begins on a negative note: "Gold's performance in 1998 can only be described as 'disappointing'." Jessica Cross of Internet-based research consultancy Virtual Gold Research takes issue with this: "It depends on what you were expecting. This was a year when Asia took a huge bite out of jewellery demand, dumped a mass of scrap, when central banks continued to privatise their assets through loans and sales, mine production rose 3%, bar-hoarding was at its lowest for 10 years, and almost all commodity prices slid steeply and pulled inflation down with them.
"For gold to record a price fall of less than 12% looks more like a wrist-slap than a custodial sentence, especially as in some currencies its value went up," says Cross on www.virtual-gold.com.
While Walker emphasised the movement of above-ground stocks, Virtual Gold questions the heavy figure for central bank sales, gross sales of 538 tons and net sales of 412 tons.
"Absolutely no new evidence of big disposals has surfaced," says Cross. "The survey makes vague reference to the Chinese and Russian governments' buying domestic output in 1997 and selling it on to the local market last year.
"But this is a simple misunderstanding of what the authorities are doing in these countries. Their reserve banks have first right of refusal on all gold, but seldom exercise it. Russia and China are acting like wholesalers, exercising right of first refusal because they have often extended credit to the miners. The bullion is held in the books but not necessarily taken into official reserves.
"Even if it is, GFMS is double-counting subsequent sales because mine output for these countries goes straight into Gold 1999's supply/ demand table. Swaps should also be logged as a sale when initiated and a purchase when closed out, which the survey appears not to do."
Walker says the market has come to expect net official-sector sales and that this has been factored into the price.
Virtual Gold also challenges how, in a year memorable for weakness in gold demand, Gold 1999 claims investment offtake could leap from 153 tons in 1997 to 537 tons last year. While coin sales grew, 23 tons was hardly significant.
"The really startling figure is 260 tons for investment demand in Europe and North America. Since 1997 is (plausibly) reported as a year of heavy disinvestment, this implies a turnaround of no less than 531 tons."
GFMS's explanation - a swing from massive short-selling in 1997 to heavy short-covering in 1998 - is best taken with a fistful of salt.
Walker gives four reasons for the short-covering theory: the global equity-market collapse had a net positive effect, dollar weakness helped, as did the collapse of hedge-fund Long Term Capital Management. Finally, there were hedge redemptions - another figure questioned by Virtual Gold.
Gold 1999 reports a reduction in net hedging from 472 tons to 58 tons.
"There were sizeable new hedges put on last year: a swing of 400 tons looks, shall we say, generous?" says Virtual Gold.
Walker is not fazed. "We stand by our figures," he told the Johannesburg audience.
"Our survey enhances transparency in the gold market but we have to collect data on a very confidential basis. There is an element of faith on the part of those who provide us with information. Nevertheless, we are subject to, and welcome, criticism."
Not a Y2K apocalypse man, Walker does not expect millennium computer bugs to push gold higher.
Nor does he subscribe to the conspiracy theory that the US Federal Reserve Bank buffers the gold price - a view being postulated by the Gold Anti-Trust Action group.
Looking ahead, GFMS predicts gold will trade between $265 and $305/oz for the rest of the year.
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