Reprinted with Permission

The Golden Ostrich: Misruling the Roost in Gold Mining

Nothing better represents the executive echelons of the gold mining industry than the legend of the ostrich: the world's largest bird reputed to respond to danger by burying its head in the sand. The legend is untrue. Brooding ostriches lower their long necks to avoid detection. Messing with them invites savage attack.

But the legend is apt for another species: the golden ostrich. Without apparent flight or navigational skills in the real world of gold and money, these birds climb to the top perches in the gold mining industry, where they sit secure in golden parachutes, singing for stock options and pecking at shareholder equity. Pull their feathers, eat their lunch, starve their young, they remain docile, accepting misfortune as their fate. Crumbs from the sovereign's table, doled out in miserly servings by his bullion bankers, are their diet and the apparent limits of their ambition. C'est la vie pour l'autruche d'or.

Where better to look for a real John Galt, hero of Ayn Rand's Atlas Shrugged, than at the head a major gold mining company, leading the fight for honest money? On peut l'y chercher; on ne le trouvera pas. Today those positions are largely filled by a bunch of Mr. Thompsons, men with mining, management and accounting skills, but as deserving as the original of John Galt's scorn:

Thinking is man's only basic virtue, from which all others proceed. And his basic vice, the source of all his evils, is that nameless act which all of you practice, but struggle never to admit: the act of blanking out, the willful suspension of one's consciousness, the refusal to think -- not blindness, but the refusal to see; not ignorance, but the refusal to know. It is the act of unfocusing your mind and inducing an inner fog to escape the responsibility of judgment -- on the unstated premise that a thing will not exist if only you refuse to identify it, that A will not be A so long as you do not pronounce the verdict "It is." Non-thinking is an act of annihilation, a wish to negate existence, an attempt to wipe out reality. But existence exists; reality is not wiped out, it will merely wipe out the wiper. By refusing to say "It is," you are refusing to say "I am." By suspending your judgment, you are negating your person. When a man declares: "Who am I to know?" -- he is declaring: "Who am I to live?"

Underground miners who do the hard, dirty, dangerous work of digging gold ore know that existence exists. Theirs is one of those activities where to forget this basic principle is to court an early and painful demise. But neither rockbursts nor cave-ins patrol the executive suite or the boardroom.

Gold bugs, the gold mining companies' largest natural constituency, may sometimes appear almost overzealous in their search for the truth about gold and money. If they sometimes see things that may not exist, it is not for want of sincere desire to know the truth but because they have already known too many official lies and deceptions. They are among the small band of paranoiacs who have good reason for their affliction. Burdened with much deeper knowledge of gold than the mining executives who produce it, gold bugs receive mostly brickbats from the industry in which they are the principal investors.

Running a gold mining company is not easy. Too diligent a search for the truth about official policies relating to gold and money can quickly lead to conflict and confrontation with powerful political interests, some of whom may wield influence over the company's bullion banks or the official permitting authorities with which it must deal. Then too, with gold money now relegated to the academic and political fringe, wearing the gold bug label too brazenly may bring a certain degree of social chill into previously warm relationships.

There is never a shortage of reasons for going along to get along. The real question is whether the leaders of the gold mining industry are prepared to change their ways and join the fight for gold in its most important use -- as permanent, natural money. If not, shareholders should wipe them out before they wipe out their companies and the industry.

Two recent statements by high-ranking gold mining executives illustrate the problem. One suggested that either a lower gold supply or increased consumption is necessary to raise gold prices. What? Annual demand now exceeds new mine production by some 60%, but this executive has yet to absorb the most basic fact about gold: it is the only commodity produced by man for accumulation rather than consumption.

Another asserted that there is no credible evidence of gold price manipulation by governments or bullion bankers over the past year, a view confirmed by a third as that generally held in the industry. But ask any of them why the British and the Swiss are selling half their gold reserves, and at best you will get a blank stare. They cannot tell you because neither they nor the World Gold Council has made any judgment on the true reasons for these sales notwithstanding the complete failure of either the British or Swiss governments to put forward any genuinely plausible ones of their own.

Nowhere is this suspension of judgment more obvious than in the WGC's own publications. The April issue of the WGC's Gold in the Official Sector (www.gold.org/Gra/Gios/11/Contents.htm) contains articles on the Swiss, British and Dutch gold sales. The main point of the first is that Swiss do not yet have any clear idea of what to do with proceeds. A child would ask -- but not the WGC -- why the Swiss are in a rush to sell gold at multi-year lows if they have no current use for the proceeds.

The main point of the other two is to contrast Dutch "deftness" with British "daftness" in implementing their respective gold sales. Not much sophistication is required to ask -- although the WGC does not -- whether the British are really as daft as they appear, or whether perhaps there is a method to their madness, not to mention whether there could be some relationship between all these sales and the enormous net short gold derivative positions that have built up in the paper markets. Confidence has been defined as suspicion asleep; the WGC and the industry it represents are intelligence asleep.

Will they wake, or resting in their collective coma will they be carried off? Two recent statements by Miss Haruko Fukuda, CEO of the WGC, could represent cause for hope. Speaking in January on Gold in the 21st Century (www.gold.org/Gra/Speeches/Hf000127.htm) to the Zurich Business Club, Miss Fukuda observed: "The scenario of prolonged weakness in the gold price is to the detriment of all, except those who want to see the absolute supremacy of the dollar." Last week, speaking at the annual meeting of the Gold Institute, Miss Fukuda revealed that some third world nations are now negotiating with the IMF about scrapping its prohibition on currencies linked to gold. This subject, including the IMF's anti-gold policy adopted in 1978 at American behest, is discussed in a prior commentary as well as The Golden Sextant.

Although not popular with the IMF, currency boards can be a reasonably effective solution to the problem of crummy, unreliable paper currencies in developing countries. But a country prepared to accept the discipline of a currency board is also ready to accept the discipline of gold. What is more, by linking to gold, a nation takes the interest rates associated with gold rather than those of another country whose currency is administered by its central bank according to the particular requirements of its own economy.

Here is a cause -- the freedom to choose gold money -- in which the WGC could and should be a leader, not merely to expand the use of gold, but to support many peoples whose yearning for economic development and democratic government cannot be satisfied without first giving them sound money. Gold is where you find it, and many mining companies have found it in the world's less developed countries. Mining gold that serves to increase the monetary base for their own expanding economies is likely in the long run to be far more attractive to these countries than mining gold to be exported for use as jewelry elsewhere.

Indeed, failure to appreciate gold's monetary importance can lead to political problems for gold mining companies even in the developed world. In a recent polemic, Gold at What Price (April 5, 2000, www.mineralpolicy.org/index.php3?whatshot=3), a U.S. environmental group argues that it is ridiculous to despoil beautiful countryside mining gold for jewelry, dental fillings and other minor purposes when gold enough to last for years sits unused in the vaults of central banks. And the truth is, if gold is not money, the point is well-taken.

By first raising the spectre of gold as competition for the dollar, and then the possibility of gold-linked currencies for developing countries, the intrepid Miss Fukuda has edged dangerously close to what has heretofore been forbidden terrain in the mostly macho male world of gold mining. Klondike Jessie herself must be smiling at the thought of this woman giving the boys some lessons in the ways of the world. And if that's her plan, she deserves support from all shareholders of gold mining companies.

But either way, the season of annual meetings is underway, and shareholders should speak out against managements that almost to a man refuse: (1) to promote gold as money, its natural, highest and best use; or (2) to act on the ever growing body of circumstantial evidence suggesting massive official suppression of gold prices carried out through leading bullion banks. In this event, it is not just the profits of gold mining companies that are affected. Other critical aspects of their businesses -- calculations of ore reserves, long term planning, not to mention hedging -- are almost certainly based on flawed assumptions about the probable course of future prices. Cambior and Ashanti are dramatic testimony to the perils of putting gold mining companies in the hands of managers too reliant on advice from bullion banks and too unaware of gold's role as an international monetary reserve.

Time is past due for the golden ostriches to be knocked from their comfortable roosts. If they cannot or will not fly in the real world of gold and money, of international monetary politics and much needed reform, they should be grounded before they crash their companies and their industry. In short, what gold mining needs in its boardrooms as well as underground are some real John Galts. C'est vrai.

Reg Howe
row@ix.netcom.com
http://www.goldensextant.com

25 April 2000

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