TIN FOOLERY CUP for gold bugs at the Cafe and the lemetropolecafe.com and specifically
goldensextant.com
""..//..
No, But Seriously, Folks
When one encounters an embarrassingly bad idea, it is tempting merely to dismiss it as such and move on to something more challenging. This has been the pattern of much of the commentary on the GMI to date. However, I believe the GMI requires more thorough treatment, for two reasons. First, it has considerable inertia. Substantial resources have been allocated to developing this concept over a full year. Serious people are invested in it; powerful interests will be disserved by its abandonment. It will not be possible to kill this little monster just by blurting out that the Steering Committee has no clothes. Second, there is a coercive, bullying aspect to the demand for 100% support among producers, and the Steering Committee's observation that pressure will be brought to bear on the 30% of the producers who are apparently holding out. Dark mutterings addressed to "free riders" by a group conspicuously plugged into the financial sector must not unchallenged go.
So with apologies to those readers who have already reached the obvious conclusion that the GMI is brain dead on arrival, I will briefly recapitulate some of its more glaring deficiencies. In the interest of fairness toward an initiative which was largely developed many months ago, I divide these into those which would have pertained even had the horrific events of September 11 not occurred, and those which pertain in light of the changed world in which we now live.
1. Reasons Why the GMI Was a Bad Idea for Non-Hedgers Even before September 11, 2001. The following objections relate to what the GMI does, not what it should do. The more fundamental objection that the GMI will absorb scarce monetary and intellectual resources to focus on the wrong thing is better and more subtly made by Chris Thompson; see A Beacon for the Oppressed, below.
a. The GMI Is Focused Exclusively on a Demand Type Which Is Elastic. The higher the price, the less you sell. The lower the price, the more you sell. Simple, really, except in a real bull market such as that of the 1970's, where I'm reliably informed this conventional wisdom breaks down. The GMI does not appear to have been hatched with a runaway bull market in mind. Nor does it appear to have been designed to provide support for an unconstrained breakout in the spot price of gold. The attraction of a modulating impact on the spot price is obvious in the case of the members of the Steering Committee and other producers who hedge their production; the appeal is far less clear for unhedged producers.
b. The GMI is Defensive and Defeatist in Tone. This is not merely a difference in values, those of accountants to whom gold is soybeans versus those of poets to whom gold is permanent, natural money. Rather, it is a hangdog, apologetic approach seemingly calculated to generate just the sort of negative press the GMI in fact received on announcement, with all the usual clichés: "Gold Attempts to Restore Its Luster," etc. We know we make something nobody likes, but we'd like to change that by showing how pretty it can be when dangled as bangles. This negative tone is not insignificant in the context of a campaign to influence how large numbers of people feel about something.
c. The GMI's Projected Benefits Are Ludicrously Small. All this for a lousy 70 to 530 net tonnes of new demand? Surely the industry can do better than this; if not, then nothing would be better.
d. The GMI's Estimated Cost Is Ludicrously Large. $700-$900 million over a 6 year period is a fair chunk of change for an industry in extremis. Kinross, to take an example with which I happen to be familiar (see A Reach Too Far: Kinross, Kinam and the Road to Redemption) posted a loss of approximately $133 million for 2000. [Memo to Bob Buchan: you can't afford your $16.3 million share; better apply for the pikers' discount. In any event, don't even think about funding this boondoggle before those accrued and unpaid dividends on the $3.75 Convertible Preferred have been brought current.]
e. The GMI's Implementation Machinery Is Preposterous. Drawing inspiration from the late Rube Goldberg, the Steering Committee proposes to create a brand new entity, independently staffed, managed and funded, then stick it inside the World Gold Council, maintaining its separate identity. This conception is so weird, unworkable and interesting that it almost has to be the product of a political struggle which would make for compelling reading. Alas, we don't know why the hedgers have elected to spurn and humiliate a trade association they control. Surely it can't simply be to placate a rabid anti-WGC faction in the producer community. Can it be that the professional staff of the WGC won't buy into this hare-brained scheme?
The foregoing considerations would have made adoption of the GMI a bad idea even if murderous fanatics had not launched a devastating attack on Wall Street and the Pentagon on September 11. It is possible, though, that with some horsetrading (we'll sign on to a variant if you cut back on hedging by X, reduce output by Y, etc.), some sort of workable compromise might have emerged had September 11 not occurred.
However, it did occur, and everyone outside the Steering Committee seems to have acknowledged that as a result our world has changed forever. In just the few weeks between September 11 and October 2, when the Steering Committee made its presentation, the United States experienced unprecedented disruptions in its financial markets; domestic airspace was closed for a time to all but military traffic; a newly united U.S. government announced billions of new spending initiatives even as private sector economic activity ground nearly to a halt; the United States commenced a new kind of war, to be waged over an indeterminate timeframe against an indeterminate enemy located in multiple foreign countries; and the Fed orchestrated yet more massive injections of fresh liquidity into the financial markets, while deliberately creating negative real short term interest rates.
Notwithstanding the occurrence of these events, and their obvious relevance to an asset traditionally viewed as a safe haven in times of economic and political stress, the Steering Committee, oblivious, pressed on with its agenda. Astonishingly, not one member of the Steering Committee made any mention of the possibility that one or more of these events might have implications for the strategy embodied in, and the economic assumptions underlying, the GMI.
2. Two Painfully Obvious Reasons Why the GMI Is an Even Worse Idea after September 11, 2001.
a. Luxury Goods Consumption Can Reasonably Be Expected to Decline in a Time of Simultaneous War and Recession. Dare I make this assertion without marshaling supporting data? Are not some things so obvious that we need not turn to McKinsey for confirmation?
b. When the Market Is Primed to Appreciate Gold's Role as a Safe Haven and Store of Value in Light of Exogenous Events Dramatically Calling into Question the Security of Conventional Financial Assets and Highlighting the Vulnerability of the Global Financial System, It Is Not Smart for a Gold Marketing Initiative to Ignore This. What more can I say?
A Beacon for the Oppressed
After all the cant and hypocrisy of the GMI blitz, Chris Thompson's presentation, delivered the following day, came as a huge relief. Its content and broader significance are insightfully covered by Tim Wood at the Miningweb in The Thompson Dilemma - gold's new politics. As counterpoint to the GMI it could hardly have been better. It was thoughtful, not glitzy. It was a call for dialogue, not a cramdown. It articulated the real issues facing the industry: a depleting reserve base; a deteriorating financial condition; control over its product exercised by entities hostile to that product but unwilling to cede control; fragmentation; and no consensus on how to take responsibility for its product. And it pointed up the shortcomings of the GMI so deftly and so subtly that sentient members of the audience were left in no doubt where the true leadership of the industry now resides.
Diplomatically sidestepping the fact that the GMI is a bad idea, Thompson took an inclusive approach. Yes, jewelry is important, albeit prosperity sensitive and price elastic. (Talk about praising with faint damns.) But the future is in investment demand. This is where potential returns to the producers are greatest; this is where the institutional and infrastructure impediments are most daunting; this is where the resources must be allocated. There is an image problem for gold as investment (an interesting observation; see The Flying Circus, below), and Gold Fields Minerals Services, the orthodox source of industry information, is inadequate and unreliable. Moreover, the existing trade association, the World Gold Council, enhanced as necessary to carry out its new mission, is the right vehicle to vet these issues, forge a consensus, and implement an industry-wide marketing program, not some brand new cost center on wheels.
The thrust of Thompson's presentation is so inarguably correct that it seems churlish to take issue with its central diplomatic dodge, that of attempting to incorporate the inertia of the GMI into a broader manifesto for industry deliverance. One is tempted to agree that something is better than nothing, that effort and money expended even on the wrong thing will likely have positive ripple effects on the right thing, that achievement of unity in a time of crisis is worth a tactical compromise or two. One is tempted, but one must stare down the temptation, for two principal reasons.
First, the GMI is more than just another bad idea, as painstakingly demonstrated above.
Second, unity in this context is a snare and a delusion. It is not the case that at some level all members of the producer community share essentially the same dreams and aspirations. When Randall Oliphant declares that at the end of the day we all want a higher gold price, one fears he is being disingenuous. Randall Oliphant is a talented man, not a moron. Have a look at his hedge book, then run a back of the envelope calculation on what a $150 increase in the gold price would mean to his balance sheet. Papering over a gulf in fundamental interests is dangerous.
Indeed, while subscribing enthusiastically to the premise and broader thrust of Thompson's presentation, I believe that the conclusions one must draw therefrom include the following:
There is a fundamental, unbridgeable gulf between the big hedgers and the non-hedgers. You either believe in your product or you don't; it doesn't get any more basic than this.
The gulf is so great that collaborative action benefiting both sides is not practicable. To paraphrase Woody Allen, the lion may lie down with the sheep, but the sheep won't get much sleep.
The non-hedgers must develop their own voice and take control of their own destiny, else risk extinction. Perhaps that voice is a re-energized World Gold Council; it is at least encouraging that the hedgers have denounced it. If not, then a new entity must be created which represents, to take a leaf from The Rev. Jesse Jackson, the gold producers not the gold traducers.
The Flying Circus
"When trouble arises and things look bad, there is always one individual who perceives a solution and is willing to take command. Very often, that individual is crazy." --Anonymous
As the delegates sipped their chardonnay and nibbled at their poached salmon hollandaise, an unruly mob swirled about in the surrounding cyberspace. Ragged and uncouth, they embodied the great unwashed that all clubs have been formed to exclude, from time immemorial. Rude noises and cries of "wimps!" and "weenies!" filled the air.
Who were these barbarians? A confederation of intellectual freebooters, empowered by the internet, intermittently and loosely linked under the "GATA" banner (Gold Anti-Trust Action Committee, www.gata.org) and united in their conviction that the market for the metal under discussion in Denver is rigged by an unholy alliance of governments, central banks and bullion bankers.
The Chairman and founder of GATA is Wild Bill Murphy, the patron of Le Metropole Café (www.lemetropolecafe.com), an internet clearinghouse for unconventional investment commentary with gold la spécialité de la maison. Murphy is a former wide receiver for the Boston Patriots and commodities trader with a messianic complex, a flair for promotion and limitless reserves of energy. He also has an unerring propensity to offend nearly everyone, friend and foe alike, with intemperate language and off-the-cuff pronouncements.
Unruly, wacky and ill-mannered the GATA mob may be, but dumb they most assuredly are not. (OK, maybe some are. They know who they are.)
..//..
ChuckaGOOD GOLD READ, Roger O is not the 3D inventor Pioneer of 3D Vision in ther 1950, same /similar name but he is the Corp Head of Hedged PUTS on gold. Ashame apears he hurt his own industry. Ashame.
LeMet
Chucalo@aol.com
Le Metropole Members,
Midas du Metropole has served commentary entitled,
"Something Is VERY Wrong In Financial Land" at The
James Joyce Table.
Le Metropole Cafe
All the best,
Bill Murphy
Le Patron
www.LeMetropoleCafe.com
----------------------- Headers --------------------------------
Return-Path: <LePatron@LeMetropoleCafe.com> |
