Paul Walker: Director, Gold Fields Mineral Services (London)
Moneyweb (Johannesburg)
BROADCAST TRANSCRIPT
April 10, 2003
Posted to the web April 13, 2003
Alec Hogg
Paul Walker is back with us. He's from London-based Gold Fields Mineral Services. They have just concluded their latest look into the gold prices prospects. Paul, good to have you back with us. You were here in February, not that long ago, and I'm going to touch on that in a moment.
But Gold 2003 - now there's been Gold 2002 and Gold 2001 and so forth. How many years has GFMS been doing this for?
PAUL WALKER: Well, in various incarnations, it's now about 35 years.
MONEYWEB: How long does it take for you to compile this annual tome?
PAUL WALKER: Well, without sort of pleading poverty and trying to make out that my job is particularly difficult, it takes a long time to do it. We have an extensive travel programme, we have a full team of 11 people, nine analysts, a couple of consultants. We run a significant travel budget, visit 40 countries a year - 30 countries last year, about 40 in the last three years. It's a resource-intensive task to do it, and we've always felt if we were going to put the numbers out there, we've got to be sure we know what we're talking about.
And I think that, relative to anybody else, we do know what we're talking about.
MONEYWEB: Going back over the years, gold is a notoriously volatile and difficult metal to predict. How have your forecasts been?
PAUL WALKER: Well, I see you're probably setting me up for something.
MONEYWEB: I'm not.
PAUL WALKER: Call me paranoid.
MONEYWEB: Just be honest.
PAUL WALKER: You know, I really do think that we've called the price pretty well. I mean, if you take us back to when we did the management buyout from Gold Fields of South Africa - I think some of your listeners may not realise that we are a completely wholly independent research company. And, since the buyout five years ago, we've made some predictions and some calls on the gold price that certainly haven't been popular within the producer community, and we were right about those. In the main we were right. I think the one time that we got things wrong was September 1999, when we had the central bank gold agreement. If anybody had predicted that beforehand, you could have traded it and retired on the back of it. We didn't anticipate something quite as profound as that, but over and above that one occasion I think in the main we've got it right. But I suspect, looking at your face, you're going to tell me that in February I said something different.
MONEYWEB: No, no. You were pretty good in February. In fact, you said the reason for the spike in the gold price - well, the spike in the gold price came on thin volumes. You said it was unlikely to be sustainable, but you were expecting in the second half of this year the gold price would do well, and you were looking around $380 to $390. So, no, you're not wrong, certainly not yet.
Are you still sticking to that view?
PAUL WALKER: I think we're still fairly positive on gold. You know, I outlined that today in the presentation that I gave. We feel that the macroeconomic backdrop as much as anything is very supportive of gold. There is rising interest from the investor community. I think there's just a perception out there that there really isn't a hell of a lot else to do with your cash these days. Now, you may take that as a sort of negative comment, that gold only performs well in times of adversity - but, after all, if you speak to most people about the role that gold should play in a portfolio, it is to insulate you to some extent from the vagaries of other markets and what's happening both geopolitically and in the broader macroeconomy. Our view is that we will see gold regain some of its losses that we've seen over the last couple of weeks, and certainly push above 350 in the second half of this year.
MONEYWEB: What makes you that confident? Because, when I go through your report and what you've compiled today, you do warn that demand for jewellery, gold jewellery, has fallen quite significantly - and that is by far the biggest offtake of gold.
PAUL WALKER: Well, I think you've got to look at the offsets here.
Somebody asked me a similar question earlier on today, and I said you have to look at the supply-demand balance in its entirety. And the one area of the supply and demand balance that has been quite phenomenally different to anything we've seen in the last 10 or 15 years has been the producer buy-back, delivery into their positions. If you like, the rundown of the outstanding producer hedge book.
MONEYWEB: So gold companies are backing their product for the first time in quite a long while?
PAUL WALKER: One could certainly make that case. I've often made the point that the issue of hedging is one of individual rationality versus collective, perhaps less rational, outcomes.
MONEYWEB: Just explain why gold mines do hedge and what hedging means.
People not as close to the gold market as you are might be a little confused here.
PAUL WALKER: Well it's effectively a capacity to lock in a given price for your production at some time in the future. In the case of gold you can go out 15 years these days, and it effectively means, if you're a widget maker, if you like, going to somebody and saying I would like to sell my widgets to you at a given price in the future, and this person says fine, that's OK, I'll buy them off you. So you're effectively locking in your revenue flows. I think the problems with hedging and the difficulties have both been related to some rather unusual hedge books which have displayed very, very odd characteristics when the price has moved significantly. And it's also been an area where, in South Africa and Australia, you've seen big currency movements. That tends to move the book in and out of the money in a way that sometimes can be perceived as having been naïve. But in the main I think you'll find that, as in any business, if you can lock in a price it's sometimes attractive to do so.
The difficulty in gold has been that individual rationality arguably on a collective basis has put pressure on the price over the last 10 years, and there's no doubt in our mind that it's given the reversal of this position that buying back has contributed to the strength of the gold price.
MONEYWEB: But over the past 10 years, as you say, the gold price has been sliding, so it's almost been a self-fulfilling prophecy. If you see that the value of your product is dropping, lock in today and you'll be better off in a year's time, and when it comes to renewing that contract, you would renew it and be better again. But the problem is that you're pushing the price of your product down continuously.
PAUL WALKER: I think that's probably true. What you've seen changing over the last year, well, it's almost two years now, has been a belief that gold is not looking into the abyss any more. And in a sense the trigger point for that was the central bank agreement. It really did change people's views of what the downside for gold was and the producer community, the investors and their shareholders have said, hang on a second, we're not looking into the abyss, we're not looking at $200 gold. In fact, this agreement, the amount of gold, the 400 tons under the central bank of gold agreement can easily be absorbed by the gold market. It's fine at price levels above $300. It's sustainable.
We've been struggling to find that equilibrium over the last two or three years and I think the $300 level is a sustainable equilibrium price. And we believe that later on this year we're going to see $350-plus prices.
MONEYWEB: Paul, that agreement by the central banks that they would only sell 400 tons of gold a year - how long does that continue for?
PAUL WALKER: Well it's about to expire and it's interesting that the Germans, Welteke, came out with a comment the other day, indicating that there isn't quite the certainty that the agreement is going to be renewed. Now my initial reaction was to say: oh, my goodness, this means the Germans are going to sell a lot more. And after a moment's reflection and speaking to one of my colleagues, he said, hang on a second, this probably means that, in the context of the geopolitical situation, issues of the dollar's strength, where do you put your assets, maybe the Germans are having second thoughts about this and in fact they are not going to sell. And certainly the Germans are going to be the leaders in this process. The GMFS house view a year ago was that it was almost certain that the Germans would substitute for the Swiss in terms of the bulk of the sales under this agreement. That looks a little less certain now, which, all things remaining equal, is actually very good for gold.
MONEYWEB: If there were an announcement from the Germans or from the central bank that the reason why they don't want to renew the Washington Accord, I think it's called, is because they don't want to sell the 400 tons of gold into the future. First of all, where would you put that as a possibility of happening on a scale of one to 10 - and, secondly, if that were to occur, how might that influence the gold price?
PAUL WALKER: Well, I think it's increasingly likely. Putting a probability on it is probably hostage to fortune, but I think it's increasingly likely that we're not going to quite see the outcome that I would have anticipated a year ago. And, given the direction in which that is going to move, I think it's going to be good for gold. If you think about it, we're talking about 400 tons from the central bank gold agreement or the Washington agreement players.
Add in a bit of central bank selling from other sources, the bulk of the metal coming onto the market has been under that agreement. If we see a significant change in that agreement it's going to be extremely interesting for gold, and I don't think at this stage it looks like it's going to be "oh, we're going to sell six or 700 tons - this is the 400". It's going to be: "Well, maybe we don't need this agreement at all, and we can allow the remaining European banks that want to sell, one or two of those who will undoubtedly continue to sell." But the big hitters, the French, the Italians and the Germans, are going to stay out. That certainly is a possibility at this stage.
MONEYWEB: Paul you mentioned the geopolitical situation. How much has it changed since 1999 so that you could get to a situation where the Germans, the French, the Italians don't want to sell gold anymore? Why?
PAUL WALKER: Well I think if you look at what's happened over Iraq - there really is a schism between, if you like, the European view of the world and the American view of the world, excluding the Brits from this. And I think that is having a real influence on people's thinking in Europe. If you're sitting in the French parliament and you are voting on things like that, do you really want to sell your gold and put it into, what, dollars? Well, it's looking increasingly unlikely that's going to be a politically palatable, if economically palatable, idea. The alternatives, the yen, the Swiss franc, the pound - what else do you actually do with the proceeds of a sale? So I think the situation that's evolved over the last six months regarding Iraq has really given rise to a shift in thinking. This is my own personal view. And, all things remaining equal, I reckon this is going to be actually fairly positive for gold in the medium term.
MONEYWEB: What about some of the other potential boosts for gold? There have been gold-backed bonds, gold-backed currencies, particularly in the Middle East. Does that come into your calculation at all?
PAUL WALKER: Sure. You ask about the geopolitical issues. If you take the GFMS view of where the gold price is going, our view is the primary driver of the gold price in the next six to 12 months is going to be the economy - stupid - it's not going to be the geopolitical. That will add froth one way or the other. It can be the cream on top or it can detract, as we've seen over the last few weeks. The real driver is going to be the economy and I don't think one should lose sight of just how important this is to the investor community as a whole - that they're lacking alternatives. These new products that are being discussed - Australia, they've launched this product. I think to date it hasn't performed spectacularly, but there is this growing pool of liquidity, if you like, that's developing there. I think the really interesting thing is what's going to happen in the North American context when this product that everybody knows about but nobody's talking about finally comes to market.
I think that's when we start to see something quite interesting in the context of gold and investor demand for gold. And ultimately our view is premised on the fact that the investor is going to be the driver of this market over the next six to 12 months.
MONEYWEB: So we can look forward to a better gold price in the second half of this year and thereafter?
PAUL WALKER: Well, I think we're going to see the gold price sustaining at levels that we've seen. The production profile is not going to be a big factor. The investor's view of this metal and the alternatives out there are what's going to drive it. You tell me what your view of the FTSE and the Dow Jones is going to be 12, 18 months out, I can probably give you a view on gold.
And I think there's still a lot of downside - that's our house view.
MONEYWEB: In stock markets?
PAUL WALKER: In stock markets. And that's going to be good for gold over the foreseeable future.
MONEYWEB: So you have this inverse correlation which has now established itself and will continue PAUL WALKER: It's certainly going to be at work for the next 12 to 18 months, but I guess the next time I'm back here you're going to ask me the same question. Make a note of this and hold me to it the next time I see you.
MONEYWEB: You see the problem for you, Paul, is that we have transcripts of every word that is uttered on this programme, so it's pretty easy to go back into what you said in February. But it's been a pleasure, as always, to talk with you. Paul Walker is a director of London-based Gold Fields Mineral Services. As he explains, they spend much of their time putting together the annual report, if you like, on the metal. Gold 2003 has just been produced and a pretty upbeat report it is indeed.
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