Interesting reading from 'The Australian' Newspaper...
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Golden chance awaits miners
By James Dunn
The Australian
December 30, 2000
I have just finished reading Peter L. Bernstein's "The Power of
Gold," subtitled "The History of an Obsession" (John Wiley Sons,
$39.90, hardback) and it got me thinking about the gold market.
If, like me, you love a well-written economic history book,
Bernstein's aptly titled (and subtitled) book will make a perfect
use for that book voucher you got for Christmas.
Bernstein's major theme is that the gold market has never been
-- and can never be -- a simple commodity market, because of
all of the emotional capital we humans have invested in the yellow
metal. After the excesses of the pillage of the new world by the old,
this reached its zenith in the days of the gold standard, when the
world's currencies were simply names for certain defined weights
in gold.
We have largely demonetized gold, in that it no longer backs our
currencies. When the European Central Bank was formed to oversee
the euro, only 15 percent of the reserves to back that currency were
in the form of gold. Gold is still money, just not officially.
Looking around the gold market these days, you would have to say
that it is still far from simple: it is just that the complications
are new. The gold market is artificial. The physical market -- the
annual trade in gold mined -- is utterly dwarfed by the market in
derivatives, gold futures, and options contracts.
U.S. gold analyst Paul van Eeden calculates that about 260,000
tonnes of gold is turned over in total each year on the London
Bullion Market -- nearly twice the amount that has ever been
mined. Only about 5000 tonnes of physical gold, says van Eeden, is
traded each year.
That is less than 2 percent of London turnover. The notorious central
bank sales -- which garner all the headlines about depressing the
gold price -- make up less than 0.12 percent of the gold market.
Miners and consumers of gold are bit players. The derivatives market
controls the gold price. Gold is not a supply/demand-driven market,
it is an exchange rate-driven market, because the price is determined
by the value of the U.S. dollar.
The U.S. dollar has usurped from gold the role of asset of last
resort. If the U.S. dollar were to fall, the gold price as expressed
in U.S. dollars would improve.
That would suit the Australian miners, whose gold price --
expressed in Australian dollars -- is actually very healthy. At
the currency's record low of 51.1 U.S. cents in October, the
Australian dollar gold price hit a record high $A526 an ounce, a
rise of almost 40 percent in a year. It is now at about A$496 an
ounce. If an Australian miner is not able to achieve excellent
margins at these prices, it should not be in business.
The buildup in the gold derivatives market has created a huge
overhang in the gold market. Nobody really knows how large it is,
but two quixotic court cases aim to try.
The first suit is dynamite stuff. It is being brought by one Reg Howe
on behalf of the Gold Anti-Trust Action Committee (GATA), which has
accused some of the financial world's most powerful individuals
and organisations of masterminding a global conspiracy to keep down
the price of gold. First defendant is Alan Greenspan, chairman of the
Federal Reserve Board of the United States. Joining Greenspan as
defendants are soon-to-be-former U.S. Secretary of the Treasury
Lawrence Summers; William McDonough, president of the Federal
Reserve Board of New York; and the firms of Chase Manhattan, J.P.
Morgan, Deutsche Bank, Citibank, and Goldman Sachs, among others.
The suit alleges that, because the highly geared mountain of gold
derivatives is mainly a bet on the gold price falling, all the named
parties have colluded to keep it from rising, so as to protect the
global financial system from the consequences of the unravelling of
the derivatives positions.
The second is a class action filed in a U.S. court by aggrieved
shareholders of London-based Ashanti Goldfields, which almost fell
into bankruptcy in 1999, when the value of its hedge book plummeted.
It seemed that Ashanti had been too clever in trying to lock in
forward prices for the gold it was mining in Ghana.
Now Ashanti shareholders are demanding unspecified damages for
alleged "reckless financial speculation." The shareholders are
alleging that when they thought they were shareholders in a gold
mining company, Ashanti was actually gambling with exotic financial
instruments, the success of which required the price of gold to fall
indefinitely. Ashanti chief executive officer Sam Jonah and ex-chief
financial officer Mark Keatley are also named personally as
defendants.
Tilting at windmills? Maybe.
Quite possibly, by the end of the cases, investors will know more
about the real gold price, and the intricacies of hedging activity,
than ever before. At least the prospect of a decline in the U.S.
dollar, more
