NOTED STRATEGIST SEES GOLD BULL MARKET
SAN FRANCISCO (CBS.MW) - Noted global strategist Frank Veneroso, in his
first published interview since 1999, says the world will see
significantly higher gold prices, but with volatility to match.
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Veneroso is a global strategist at Allianz Dresdner, one of the world's
largest managers of financial assets. He is author of The Gold Book
(1998) and numerous research papers and studies on financial markets.
Veneroso is currently managing a pool of gold equities distributed by
ABM Amro and has in the works a global-macro fund and an energy fund.
I have reviewed Veneroso's published record at Allianz Dresdner and
elsewhere, and this guy has made many great calls on many different
markets. His early June call to exit the surging bond market was
masterfully timed.
Here are excerpts from my interview this week with Veneroso, who will
appear at the New Orleans Investment Conference
(http://www.neworleansconference.com/) in late October. The full and
revealing interview, along with my own take on why mining equities are
preparing for a massive move higher in the fourth quarter that begins
tomorrow, will appear this week in The Calandra Report.
(http://cbs.marketwatch.com/commerce/theCalandraReport.asp?siteid=mktw&dist=hfdtab&pname=tcr)
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ON GOLD STOCKS
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"There is a huge dispersion of valuations in the gold equities market.
The ones that are the household names tend to be discounting much higher
gold prices. Many of these companies sell at large premiums to net
present value. So gold can rise, but the percentage appreciation can be
a lot less than what people are expecting," Veneroso told me.
"The gold bulls say valuations don't matter, that the market in these
things will be like an Internet mania. But if value does matter, we have
trouble ahead out there. Nonetheless, there are the companies that trade
at a discount to their net present value. Now the stocks have had a huge
run, from 50 on the HUI (Amex Gold Bugs Index) (HUI) a few years ago to
210. And a lot of the money that is in these shares doesn't know what it
owns."
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ON STOCK MARKET RISK ...
"It took three years from 1997 to March 2000 to take gross margin debt
from $5 billion to $21 billion on Nasdaq (QQQ). That margin debt fell
back by 80 percent by the end of 2002 to $5 billion. And now, on a lousy
15 to 20 percent retracement back up on the Nasdaq, this gross margin
debt has quintupled to $26 billion, a new high, by July. In every other
market bubble I can think of, margin debt came down and stayed down
after the bubble burst. Some of this money has been chasing gold
equities. That's the retail market. You also have hedge funds. They are
under enormous monthly performance pressure, and their performances are
all down. So they have gone into the gold stocks without knowing
anything about gold. There is this kind of market risk in the gold
sector."
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.. AND GOLD RISK
"Then there is the more important risk in the underlying metal.
Basically, the official data from the GFMS (Gold Fields Minerals
Services) and others on gold supply and demand are all wrong. The price
of gold (38099902) has been held down by large central bank supplies.
Some day these supplies will abate and the price of gold will go much
higher. For now, these supplies continue and they may continue for some
time."
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ON A 'MANAGED' GOLD MARKET
"In The Gold Book (1998), I said there is no obvious reason why
central banks and other official organizations would want to manage the
price of gold. I described how the existence of large amounts of gold
lending created an inadvertent corner in the gold market. I called it
'the prison of the shorts.' The short position in the gold derivatives
market simply could not be covered in a short period of time at any
price, and certainly not at a low price. I predicted that, when the
shorts in the market tried to cover, there would be some kind of crisis
followed by a negotiated settlement between the short sellers and the
lending central banks. My guess is that the official sector had to
intervene to diffuse such a crisis after the gold price spike that
followed the Washington Accord in 1999. They appear to have succeeded,
and this intervention in gold markets continues, although I am not sure
why," Veneroso told me.
"How do I know this intervention continues? There are 500 or 600 metric
tons of speculative long positions on the COMEX, but that is the tip of
the iceberg. The big market is the over-the-counter market. The total
net speculative position is probably many times what we see on the
COMEX. Thousands of metric tons? Who is taking the other side of that
trade? In the old days, it used to be the producers, setting up their
hedge books and selling forward. Now, they're covering hedges. Who else?
There are gold dealers, and a lot of the people think these are the
short-sellers in the market. After the price spike in '99, they have
closed such positions. So there is only one possible counterparty now,
and that is the official sector. This is just like currency
intervention."
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WHY CENTRAL BANKS MIGHT WANT TO DEPRESS GOLD
"Asset bubbles create private debt bubbles. When people feel wealthier,
they are more likely to spend more out of their income. And so they have
to borrow. We saw this in Japan in the '80s. We see it in the U.S. When
the asset bubble bursts, wealth disappears but the debt burden does not
go away. Price deflation is really dangerous when you have rising
private debt. That's why the Federal Reserve is so concerned about price
deflation. It becomes a crushing burden that sends the economy into a
debt-deflation spiral. Faced with this, the central banks realize they
have to employ unconventional methods -- helicopter money it's called,
the electronic printing press. More and more investors are catching onto
this and the threat of a deliberate debt-alleviation inflation that will
confiscate their paper money, and they see in this positive implications
for the price of gold."
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ON 'EXPECTATIONS MANAGEMENT'
"The stakes are very high for the official sector. If gold goes up to
$420 an ounce, it will go above a 10-year level and more speculation
will occur. The price will explode. It would become apparent that the
central banks have been selling their gold at lower prices and basically
been misleading the market in their incessant claims that no such
intervention has been going on. They would wind up with a loud clarion
call from a gold market that is no longer ignored, and if it turned out
they were managing the market, it would be a huge blow to central
bankers' reputations," the strategist said.
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ON THE FUTURE
"I think the central banks don't want an exploding gold market. I
think there are a lot of weak hands in the gold market. So the odds
favor a correction of gold prices. We here feel there is more of a
bubble unwind ahead of us in the overall paper market, more relapse. Not
Armageddon, mind you, but more of what we've seen in the past three
years. There is no synchronized robust global recovery. There is a
global output gap. So that means more disinflation in the intermediate
term. A shift in market perceptions from imminent inflation to more
disinflation could dislodge some of the short-term speculative longs in
the gold market," Veneroso said.
"If there is a real inflation threat at some future time, which is
likely, portfolio demands of all kinds for gold will be sufficient to
overcome any official resistance in the market."
The full interview with Frank Veneroso will appear this week in
subscription service The Calandra Report.
(http://cbs.marketwatch.com/commerce/theCalandraReport.asp?siteid=mktw&dist=hfdtab&pname=tcr)
Venoroso in late October will make a rare speaking appearance - at The
New Orleans Investment Conference.
(http://www.neworleansconference.com/) I'll be there, too. Mention CBS
MarketWatch or The Calandra Report and host and Gold Newsletter Editor
Brien Lundin will roll out the red carpet for you. |
