Introduction by vronsky
The following gold analysis hit the Internet exactly one year ago. Its author is obviously a well informed and very insightful market technicain, who goes by the Internet handle of "grumps." Based upon his uncanny understanding of global markets, I strongly suspect he is an important person in international finance, possibly a veteran high profile Wall Street or London financial seer - who cannot reveal his identity for fear it might compromise his professional affiliation. Therefore, I am obliged to conclude that his opinions are of the highest convictions - devoid of any bias or hype.
The essence of his thought provoking study rings with the same clarity and logic today as it did last year. Yes, we all recognize the price of gold has been dribbling downward for some time. Nevertheless, the same reasoning is still sound and pertinent today - and eventually the gold market will unfold as "grumps" forecasts. Following is the considered view-point of gold market sage "grumps."
My message in short - don't be, (i.e. caught short in gold that is) . As I jokingly say to one of my associates who has missed out on several outstanding investment opportunities that I had literally begged him to take advantage of, don't be a "Woulda, Coulda, Shoulda" investor. Gold is now at such an opportunity. I dragged my crystal ball out of the attic just for you and dusted it off. The view of the future for gold is a little fuzzy (I don't use it as often as I used to) but every once in awhile some remarkably clear images come through. Although on a recent trip to Europe, I received some excellent advice from a taxi driver. I will share some thoughts in the following longer version of my comments.
I find it odd that the World Gold Council (WGC) often changes its stance on its outlook for gold depending on its audience. Niraj brings to our attention WGC's Helen Junz who recently addressed a German bankers' conference reporting that gold is consolidating at present or lower levels. (Germany along with Japan and Switzerland oppose the (cash poor) IMF plan to sell a small portion of its gold holdings). 'The article went further to say that central bank liquidations of gold reserves has kept a lid on prices all year. Many believe it will continue. Central banks control 35,000 metric tons of gold, enough to keep a lid on prices for the next couple of years.' Hah! Contradicting this stance is the recent January '96 comments by Mr. Rolf W. Schneebeli, a chief executive of the WGC, who made several statements to Business Line during an interview. ``A major part of the increase in international prices of gold has been caused by the weakening of the rupee (against the dollar) ," he said. He was referring to the currency of India of course. He also stated, "Gold supplies have been stable to lower, while demand has been growing." On South Africa, Mr. Schneebeli commented, "Mining in South Africa was proving to be financially unviable as gold was located at depths of 4,000 metres where temperatures range between 40-50 degrees centigrade. A rise in mining costs is prompting gold mines to close production. These factors have encouraged forward selling by gold producers in South Africa". "These are signs of desperation. Producers are seeking the first opportunity to secure their capital for their mining operations," he said. As we know, South African gold mines have been selling forward at an unprecedented pace. One company was reported to have sold its entire production eight years forward. South African mine output, still over a quarter of the world's total, has begun at least a cyclical, and perhaps a secular decline. "As far as gold prices are concerned all fundamentals are positive," he said, indicating that the precious metal has the potential for a further upward movement. Mr. Schneebeli opined the end of central bank sales of gold. "We saw a lot of central bank sales during 1992-93. But in 1994-95, there was just one sale of 175 tons by Belgium's central bank. ( Japan bought 65 tons). Today, central bank sales of gold are close to zero," he said. What is especially bullish for gold investors is that eventually these forward sales by mining companies (just as gold production has been peaking!) will have to be unwound causing much higher prices for gold. How will higher gold prices occur? - Here are some thoughts on this.
But first our contributor, David, in a later submission brings us (another viewpoint contradicting Helen Junz that bears repeating). Mr. Murray's (managing director - Gold Fields Minerals Services) statement that the (gold) liquidity picture was even less reassuring when it was realised that the developing country banks were the most active lenders to the market and some 40% of their reserves had been lent last year. So, "only about 10% of official gold reserves (ie. 3500 tonnes) come into the easily mobilised category".
Let me express my conviction that the central banks are in no way going to sell their 35,000 metric tons of gold or even a significant portion of it. This is not an option for them as I will explain in a moment. This will not keep the lid on gold prices for the next couple of years as Helen Junz' article suggests! There are many reasons for this. Where shall I start?
Let's put aside the many bullish factors for gold such as: the overwhelming supply/demand fundamentals (world-wide production has peaked, at least temporarily, after expanding significantly over the past decade) , or the fact that the transfer of wealth to (expanding economies) Asian countries (historic, acute appetite for gold - yes that Asia!) dwarfs the size of the wealth transfer to the Middle East during the 1970's oil crisis. Japan, India and China are big gold buyers. Let's put aside the fact that the world has the lowest stockpiles in history of grains and some other commodities at a time of doubling demands, and aberrant weather trends. Is inflation rising? I think so. Money supply is rising for the many reasons already discussed in other comments. Gold funds are nibbling. Turkey has a new gold exchange and is presently building a refinery to produce gold to international norms. Saudi Arabia and Uzbekistan are building refineries as well. Gold's popularity is spreading. One could make an argument that gold will rebound significantly to the upside as gold is held down by central banks as it was in the 60's via the central banks' infamous gold pool. Of course gold later rose significantly as a consequence. Or one could discuss the huge gold derivative speculations held by central banks especially by Latin American central banks. With demand projected to continue to exceed supply, gold borrowers will rush to cover as gold prices climb above key levels. Or we could discuss the view of gold as the ultimate alternative currency and how that will impact the price of gold. On this, I would like to discuss a few things about currencies.
Okay then, but first let's discuss briefly the European Monetary Union (EMU). What does this have to do with the price of gold you might ask? ALOT! Single currency achieved! (or so they wish in their wildest dreams!) The proposed European currency for the EMU is called the Euro or ECU - European Currency Unit. It's not the ECU though, but Luxembourg is the ONLY country so far meeting the strict Maastricht criteria for the EMU. The EMU is tinkering with the strict treaty criteria to make square pegs fit into round holes. This has now been publicly echoed by former French president Valery Giscard d'Estaing. Societe Generate head Marc ViEnot called for a renegotiation of the treaty and delay of the single currency, saying that France's chances of meeting the criteria were "negligible." This irritated head-in-the-sand types like French PM Juppe who whimpered, "Not only has the government not discussed it, but it will not discuss it." It's a shame the same type of fervour isn't directed towards cutting taxes, government regulation & social programs, THE REAL REASONS EMU CRITERIA WON'T BE MET. Their new game is to publicly deny any possible delay while privately acknowledging that the Euro (ECU) has no clothes. The EMU ringleaders have been so busy asserting the 1999 start date, that they haven't had time (or intestinal fortitude) to see if the man in the street is following them down the Euro single currency road. (He's not!). Bundesbank president Tietmeyer warns that an unsuccessful launch of EMU would badly harm Europe, & HIGH UNEMPLOYMENT RATES ARE A MORE URGENT PRIORITY THAN A SINGLE CURRENCY. Gosh, you usually have to talk to a taxi driver (as I did in Germany - he was a laid off engineer) to get such common sense! As we know, this year Belgium's central bank sold 203 tons of its gold to bring its budget deficit in line with the other members of EMU as required by the Maastricht Treaty. This short lived trend of Western central bank selling of gold will radically slowdown. Here's why: the most important factor is the rapidly deteriorating prospects for the European Monetary Union and implementation of the Maastricht Treaty. Fading prospects for the EMU will discourage further depletion of the gold holdings in central bank reserves. Industrialized Europe characterized by chronic deficits and national debts, URGENTLY REQUIRE MONETARY STIMULUS TO RESTART THEIR ECONOMIES. (We continue to see Germany lowering its interest rates - 13 times thus far). In 1992 we saw what happened to Great Britain and Italy following the monetary policy dictated to them by the Bundesbank who has its own economic agenda. As I referred to the man in the European street not following EMU down the Euro single currency road. He won't, neither will the taxi driver! Mounting social pressures burdening economic growth will see to that. Consequently, liquidation of gold reserves by central banks that was based on the assumption of an eventual common currency is no longer justified.
| Within a very short time frame probably by 1997, an equilibrium will be achieved as Western central banks' gold sales decline and Eastern central banks' buy at accelerated rates. As this happens, it will be impossible for gold to remain at the present price levels. What would cause Asian central banks to buy gold for heavens sake? How about a spectacular buildup in financial reserves. That is exactly what has been taking place. Examples of this are reported in the news frequently. Reserve positions of Asian and Latin American central banks are presently almost entirely in the US dollar. Although it's possible the dollar will reverse its long term trend and rise for the remainder of the century, conservative financial management of central banks will want to diversify their reserve assets. Will they want to diversify into the overvalued (and very much so) yen and D-mark as alternative reserve assets? No way Jose! As we know the objectives of the US, Japan, and Germany have been to push down their values to entice foreigners to buy their exports and stimulate their economies. The obvious alternative to an overweighted dollar asset or a depreciating D-mark or yen asset is gold, REPRESENTING ONLY ABOUT 5% OF THEIR PRESENT RESERVES. This shift in Asian asset preferences will coincide with the slowdown in Western central banks' sale of gold. You guessed it, the amount of gold coming onto the markets will fall short of demand, gold will rise significantly, forward sales will have to be bought back, as the contango and interest rates rise central banks will LOAN gold rather than sell it, gold derivatives will unwind, speculators will be forced to cover their shorts, etc. Will this transfer of wealth to the Asian countries continue? Current news reports inform us the U.S. trade deficit with China may surpass that of Japan within a few years. |
Now is a much better time to buy gold and gold shares than it was this past January when the price breakout above $400 was being touted in the media. Don't be a "Would, Coulda, Shoulda" investor a couple years from now and wish you "hada" bought now. The only time to be investing in something is when it's cheap. It's only cheap when it's out of favor and others don't want it. Governments, Wall Street and the media have been doing their best to promote the idea that gold is no longer relevant. When investors realize how relevant it is, especially to central banks and governments, they will pile into it by the droves. Will you want to buy it then? When you feel it's safe to buy because everyone is doing it or because all the media is writing about it? Perhaps you'll feel more comfortable when your broker recommends it. No, then you'll be like my friend who goes into this "I shoulda, coulda, woulda" nonsense and buys begrudgingly at much higher prices or at absurd levels. Sure, there could be a set back for gold in the near term, but believe me the smart money would be buying with both hands. They realize it's just a matter of time and patience knowing the fundamentals are in place for an enormous rise - sooner than later. But to be caught short at this point in time is the greater of the two risks. The best strategy is to start buying now and only add to your position on dips - and there will be many as gold trends higher over the years. I recommend holding a part of your investment portfolio in bullion as well as stocks and also to diversify among the precious metals. I favor those companies that don't hedge as these are the ones being eyed by fund managers. Newmont Gold, Agnico Eagle, TVX, etc. If you don't have much money to invest then consider a gold stock mutual fund such as the Midas Fund, Invesco Stategic Gold or the Benham Global Gold Fund as a more conservative choice. Enough said. Good Luck!
"grumps"
international financial seer
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