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ARCHIVED DISCUSSION FROM 1/3/2002
All times are U.S. Mountain Time
(Yesterday's Discussion.)
The Invisible Hand
(1/3/02; 23:29:18MT - usagold.com msg#: 67655)
Normandy: The (London)Times vs. FT's Lex column
The Times puts Champion de Crespigny, the founder of Normandy, in the spotlight and says that he, or at least Normandy's board, prefers Newmont to AngloGold and Barrick. It says that the offer from Newmont also spells almost certain death to a bid by AngloGold.
http://www.thetimes.co.uk/article/0,,37-2002003332,00.html
The FT, on the other hand, gives full marks to AngloGold for unilaterally calling a halt to the bidding war for Normandy Mining - even if it has not yet thrown in the towel.
It says that Investors can take (on January 11, 2002) AngloGold's offer as it stands, or collect more cash from Newmont in the future. Given the volatility of share prices, and if they believe gold prices will rise, Normandy shareholders may prefer to wait and opt for Newmont's UNHEDGED gold position, says the FT's Lex column. Concerning the consolidation talks between AngloGold and Barrick Gold even as it raised its offer for Normandy. It could be a daunting prospect: gold miners' return on equity rarely exceeds single digits, and Newmont has shown how strong is the temptation to overpay. Yet less fragmentation, if that helped push up the gold price, would benefit all.
(The Invisible Hand: would that benefit hedgers?)
http://news.ft.com/ft/gx.cgi/ftc?pagename=View&c=Article&cid=FT3I0CL01WC&live=true
Waverider
(1/3/02; 23:22:38MT - usagold.com msg#: 67654)
Ashanti Seeks Refinancing Approval
http://news.ft.com/ft/gx.cgi/ftc?pagename=View&c=Article&cid=FT3OCP4LZVC&live=true&tagid=ZZZINS5VA0C&subheading=middle%20east%20and%20africa
Snippit:
"Ashanti Goldfields, the African gold mining company, has contacted its two biggest shareholders to approve the terms of a deal aimed at refinancing $219m (£151m) in convertible bonds. Ashanti, once one of the world's largest gold miners, was pushed to the brink of default in 1999 when the gold price moved against its bets in the futures market. That prompted a wave of calls on its hedge book."
Waverider: Black Blade - you've repeatedly warned us to remember the Ghost of Ashanti Past...sounds now like they want the Ghana government to relinquish its "golden share" in Ashanti to free the company to take part in industry consolidation.
Pizz
(1/3/02; 21:30:18MT - usagold.com msg#: 67653)
Stock Markets
Nice thing about January, all the funds have to do is buy, buy, buy for the first 5 days, because "as the first five days go, so goes January, and therefore the rest of the year." Or so the oddsmakers' say.
Kind of puts a (psyco)logical floor under the SMs. Would not suprise me to see us stay above 10K thru summer with a late push to 12,500. As $ and bonds delcline, rates and inflation increasing, hot $'s got to go somewhere. Has similar situation to about 1970 with a false break over 1000 and then drop to 600 or so.
Also have to consider the "political" cycle. Too early for any type of sustained run....don't think they could hold it thru 2004.... earnings running too far behind valuations.... Best guess would be the false breakout and a CRASH this fall, then a slow sustained grind....flat basing for a year or so and then grind it up thru 2004 for reelection.
Similarities to late 60's thru 70's are all over the place.
War, inflation, (stag-flation if we're luckier than I think) Dow stock charts look similar (run a monthly from 1950 - 1980 on the Dow). Anyone want to bet we won't have some type of oil shock in the next few years? (Back then had a 71 Jag XKE (GREAT CAR) but it only held 10 gallons. Spent about as much time in gas lines as I did drivin' it.)
Gold & Silver lookin' better all the time, just going to be one heck of a lot more "exciting" this time around. Like comparing an Apollo launch to Deep Impact!!!
Pizz
Waverider
(1/3/02; 21:22:12MT - usagold.com msg#: 67652)
Privateer 67579: New Deficits to Force Boost of Debt Ceiling
http://www.latimes.com/news/nationworld/politics/la-000000671jan03.story?coll=la%2Dnews%2Dpolitics%2Dnational
Quick Snippit:
"Treasury Secretary Paul H. O'Neill has notified Congress that the current $5.95-trillion debt ceiling could be breached as early as February. He asked lawmakers to move quickly to raise the limit to $6.7 trillion. The outcome is not in question. Failing to boost the ceiling would cause an unprecedented default on payments to holders of government bonds. But the vote will reopen a rancorous debate over the tax and spending priorities of the Bush administration and its allies."
Cavan Man
(1/3/02; 19:57:22MT - usagold.com msg#: 67651)
See quote below.
Wisdom has no boundaries in space and time.
"These are the times in which a genius would wish to live. It is not in the still calm of life, or the repose of a pacific station, that great characters are formed. The habits of a vigourous mind are formed in contending with difficulties. Great necessities call out great virtues. When a mind is raised, and animated by scenes that engage the heart, then those qualities that would otherwise lay dormant, wake into life and form the character of the hero and the statesman".
John Adams
I believe he was right then and is right as rain still.
Take heart Canuck!!!
Cavan Man
(1/3/02; 19:49:24MT - usagold.com msg#: 67650)
Editor, The Guilded Opinion
Get physical :>).....CM
Cavan Man
(1/3/02; 19:48:19MT - usagold.com msg#: 67649)
@ CB (too)
USAGOLD67640
"What he said."
Siochain
(1/3/02; 19:37:54MT - usagold.com msg#: 67648)
view of gold/silver pricing
http://www2.marketwatch.com/news/newsfinder/newsArticles.asp?guid=%7B4D1FBBFD%2DED93%2D45B4%2DB7DB%2DFE76E7229FED%7D&doctype=2005&siteid=mktw&selCount=50&value=gold&property=word&
1/2/2002 3:15:00 PM
Jan 02, 2002 (FWN Financial via COMTEX) -- New York, Jan. 2 (ODJ)
snippet: Although gold has been loathe to respond much to the recent terrorist attacks or to the Argentine loan default, it may stand to gain more from further deterioration in the Japanese economy, according to Leonard Kaplan, president of Prospector Asset Management in Evanston, Ill. "With the huge pool of capital in Japan perhaps looking for a new home, it is indeed possible that gold and other precious metals may finally be seen as a hedge against their rapid depreciation of their currency and a store of value for the notoriously conservative Japanese mainstream investor," Kaplan said in a market report.
For the moment, however, gold will be focused on currency moves and will probably avoid any major price movement. How the dollar receives U.S. monthly payroll data due for release Friday will be watched closely. "Unless it gets above $280, you won't really see any short covering. You may see some selling under $275. Otherwise it will be trapped in that range," the bank trader said. Comex silver futures may have dropped a few cents but continue to look steady because of a lack of aggressive selling, a second trader here said. The bank trader dismissed the notion that the strength of shorter-term silver lease rates was related to loans being called in before the end of the year, but said he wasn't sure what was behind the firmness. "But with lease rates still negative 15% for one month lets you know the squeeze isn't over yet," he noted. While initial support for March is seen around $4.50 an ounce, the price could tumble back to the $4.20s, from whence the runup started, if lease rates come off, warned trader Jim Pogoda of Mitsubishi International Corp. Liquidity will only be eased by long liquidation, which isn't likely while dollar interest rates hover around 2% a year, making it cheap to hold silver. Standard Bank London Limited predicted the price of silver could surge above $5 an ounce again in the first quarter of the year but its ability to hold that level depends on the balance of Chinese selling above $4.75 versus the Indian preference to buy it nearer $4 an ounce.
R Powell
(1/3/02; 19:20:26MT - usagold.com msg#: 67647)
CoBra(too)
From CB2's 67640, "Sorry, for boring you - cb2"
Don't be, you never have.
******
Thanks for a great summation
Of the much talked about hedge situation
Whether, in gold, unhedging decisions
by volition
Or, in silver, not renewing leases is
the suspicion
Both may result in metals that
higher prices command
And surely then, our long awaited
new public investment demand.
Rich
Black Blade
(1/3/02; 19:09:08MT - usagold.com msg#: 67646)
United to Shut Five Centers, Cut Workers
http://biz.yahoo.com/rb/020103/business_airlines_united_dc_2.html
CHICAGO (Reuters) - United Airlines said on Thursday that it will close five domestic reservations centers and furlough 899 workers as a smaller flight schedule following the attacks on the United States reduced reservation activity.
Black Blade: Dem Bones - Dem Bones - Dem Dry Bones …..
Black Blade
(1/3/02; 18:56:11MT - usagold.com msg#: 67645)
Argentina Defaults on Debt
http://biz.yahoo.com/rb/020103/business_economy_argentina_default_dc_1.html
Snippit:
BUENOS AIRES, Argentina (Reuters) - Argentina missed a $28 million bond payment due on Thursday, a government source said, touching off a debt default that could become the biggest in history. ``We are now in default. The bond payment was not made,'' a government source told Reuters on condition of anonymity on the same day that new President Eduardo Duhalde swore in his cabinet.
Black Blade: Just the Tip O' the Berg. Just $132 Billion to go.
USAGOLD
(1/3/02; 18:29:56MT - usagold.com msg#: 67644)
LBMA Motives and Principle Objectives: Gold Euro VAT Tax Exemption
http://www.lbma.org.uk/Al25vat.pdf
For your analysis and interest from Rothschild's Kozlowski and for the record. MK
Editor, The Gilded Opinion
(1/3/02; 18:16:24MT - usagold.com msg#: 67643)
Making Sense of the Gold Price
http://www.usagold.com/THEGILDEDOPINION.html
THE GILDED OPINION is privileged to present another timely article by the highly regarded analyst Paul van Eeden. In "Making Sense of the Gold Price" van Eeden explores the background behind the current market and puts prices in the perspective of currencies from around the world. Read why van Eeden believes, "Gold appears to be the single best investment for anyone interested in capital preservation today."
Black Blade
(1/3/02; 17:42:47MT - usagold.com msg#: 67642)
CoinGuy - Canuck
CoinGuy -
I knew that the RFC group was looking into the Hill 50 deal as possible advisors to some outside group. The possible suitors mentioned are generally unhedged expect for Sons of Gwalia (with an extreme hedge book). Personally I think even Gold Fields would be a good candidate as well. Now that they have swallowed up Delta I wonder how quick that hedge book will be unwound.
Then again, I also hold shares in Harmony, Gold Fields, Franco-Nevada, and a few weeks ago took some shares of GoldCorp. Hopefully I can get through tax season and extinguish debt (incurred on some capital improvements) in the next couple of months because I will be looking to increase the physical portion of the portfolio for some "balance."
Canuck-
I think I can almost hear the "Fat Lady" warming up in her dressing room. Sounds like Wagner.
Cheers!
- Black Blade
R Powell
(1/3/02; 17:34:12MT - usagold.com msg#: 67641)
GATA on talk radio
Tonight, according to the e-mail I just received. He's scheduled on the Roger Fredinburg Show at 9:00 central and 7:00 Pacific time which, I think, is 11:00 my time (EST). I have trouble staying awake until 9:00! I've never heard of Fredinburg.?
I put Roger Fredinburg in the search box and found KWRO 630 and KBTK 1310 which I'm guessing are AM radio stations.
Go get'em Bill !!!
CoBra(too)
(1/3/02; 17:16:25MT - usagold.com msg#: 67640)
Re: Gold Oversupply -
Black Blade - I totally concur with you - any notion of gold oversupply is ludicrous and as MK suggested the Leanne Baker analysis written about a year ago the numbers are congruent of my own analysis - which may not mean all to much. Still in L.B's numbers a decline in producer forward selling was already anticipated, though numbers seem a bit low now.
The real "swing"-factor always was and will be new public investment demand - as disinvestment may have have run its course - it seems that overall public gold investment demand was up substantially almost everywhere last year.
All else being equal, here are the main positives for a generally higher POG level:
* Rising Investment Demand - (ask your PM dealer about the
brisk pace of sales over the year.)
* Declining forward sales by producers and trimming of
hedge books - and, yes even by AU/ABX/PDG - and more
get trimmed by takeovers - forcefully! (Forward sales will
only accentuate tomorrows shortfall - since you can't sell
the same product twice - tsk, at least not if you're not
allowed the same accounting procedures as CB's ...)
* New production slightly lower (as highgrading and lack of
defining new reserves start to bite - early wake-up call
to the main producers as they've been burning the
candle from both ends. Consolidation doesn't add to
overall reserves and lack of reserve replacement will
severely curb production down the road.
Assuming that forward sales and CB leasing (a/o sales) have filled the gap, so far; Assuming that Frank Venoroso and GATA is correct by an overall gold short position of about 15.000 tons. Further assume, that both producer forwards and CB leases are creatures of similar heritage, and then mix in the WA of Sept. 1999 ...
Again, assuming the official holds 33.000 tons of au - even as it seems about half of the gold is gone (or in deep storage?), another 40%, or so is held in EU CB's, the maneuvering room seems to become extremely tight, to say the least...
...And not last, if NEM wins the battle over NDY, together with cash rich FN, I would conclude, that a major sea change of perception will occur pretty fast.
... and this may lead to a very dangerous novel perception
that the overall price finding mechanism of the US $-based futures markets for most of all important commodities may be perceived as coming close to green-mail! - So do cry for Argentina ... and pray another Enron may not surface, though it may have only been the tip of the ice-berg ...
... And finally, let the latest monetary injections of the boomers 401 K's filter into the SM's - until, maybe mid January - and then you may learn what a lesson a blow off top can deliver to the psyche of a generation of the buy and beholders.
... And lastly the euro had a nice debut - and whatever you and I, for that matter think - it is the first contender to the $-supremacy, hegemony as the sole reserve currency of all unbacked, true currencies in 30 plus years.
Sorry, for boring you - cb2
Canuck
(1/3/02; 17:11:58MT - usagold.com msg#: 67639)
@ BB
Thanks for the note.
I watched John Ing at 4:40pm (Eastern) on RoBTV (Canuck version of CNBC). He said of the latest NEM development "that although the deal is not final, it looks like a done deal to me".
He believed "gold would average $325 in 2002." (Cool, $300 first quarter, 325 2nd and 3rd and $350 4th, then the hedgers pop and we have 4 digit gold in 2003)
He mentioned Kinross might be gobbled up in the consolidation process and he saw an association "with the intermediate, low-cost producers such as Goldcorp, Agnico and Meridian".
In a word, awesome!
Canuck
The CoinGuy
(1/3/02; 17:07:49MT - usagold.com msg#: 67638)
Black Blade
http://quote.bloomberg.com/fgcgi.cgi?T=marketsquote99_news.ht&s=APDQCqBSDSGlsbCA1
Enjoyed your posts today! I saw your mention of Harmony's bid for Hill 50. Something I was looking forward to as a holder of Harmony's shares. Any company that is going to unwind hedges gets an extra star in my book, but the story gets more interesting. Enjoy the article...
The CoinGuy
Black Blade
(1/3/02; 17:03:15MT - usagold.com msg#: 67637)
Merrill Lynch shutting Denver office with 1200 jobs
http://biz.yahoo.com/rf/020103/n03198509_2.html
Snippit:
NEW YORK, Jan 3 (Reuters) - Merrill Lynch & Co. (NYSE:MER) said on Thursday it is closing an office in Denver with 1,200 employees, in the latest cost-cutting move by the largest U.S. securities firm.
Black Blade: The "Bone Pile" growth resumes. Not a sign of a healthy robust economy or a sign of an economic recovery. We should see many more layoffs as the Recession deepens over the next several months.
Henri
(1/3/02; 16:20:31MT - usagold.com msg#: 67636)
Gold in Deflation link
http://www.gold-eagle.com/research/ascanindx.html
About half way through this series...very interesting. Perhaps the great influx of new money we are seeing is an attempt to maintain stable money supply through the Enron and Argentine defaults...great destroyers of money. Deflation upon US being offset by currency creation to maintain stable pricingof goods and services?
Black Blade
(1/3/02; 14:59:30MT - usagold.com msg#: 67635)
USAGOLD - Thanks!
http://www.usagold.com/gildedopinion/BakerSigns.html
That is exactly what I was looking for! I should've known to check there first. I should think that this data will put to rest any idea of a Gold supply overhang. Cheers!
- Black Blade
darkhorse
(1/3/02; 14:56:18MT - usagold.com msg#: 67634)
Interstate
Oops, sorry...I took the early 40's and assumed an approximate age of five. I should know better than to think that everybody else has as much of a problem with CRS disease as I do. :)
Black Blade
(1/3/02; 14:51:22MT - usagold.com msg#: 67633)
uponroof - You Got It!
You see exactly my point why NEM-FN will likely set into motion a cascade of events that will probably lead to a sharp rising POG. Now think of the unwinding of an additional 1.5 million oz with the HGMCY acquisition of Hill 50. That is just the beginning, DROOY is unwinding their hedge book as well. I understand that Kinross may be considering doing the same. A change is in the air. Cheers!
- Black Blade
Interstate
(1/3/02; 14:50:16MT - usagold.com msg#: 67632)
@darkhorse re: rationing
Redo your math on Horatio's age. I well remember the ration coupons and metal drives during WWII and I am not yet 65. Some of us remember things VERY well when we were 2-4 years old. Later, Interstate
uponroof
(1/3/02; 14:40:51MT - usagold.com msg#: 67631)
Tonnes of fun
A little perspective.
NDY's 9,500,000 ozs. that are going to be bought back on the open market equates to 270+- tonnes.
(9,500,000 divided by 35270 = 269+ tonnes)
In other words, NEM-FN could buy all the gold at the next 12 BoE 'auctions', and still be 30 tonnes short!
Point is there is a lot of hedged mines out there who are beginning to wonder how long they can safely wait before they cover, or be late-and have to pay more than they can afford....which will trigger 'en faillite' or is that 'force manure' (majure).
Oh and let's not forget about the Japanese. They still want their fair share. hee hee hee
I sure am glad I am not a gold hedge fund right now.
********
Canuck-this deal still has to get through the SEC. We all know how gummints feel about higher gold prices. And on that note, well said, sir darkhorse. You make some very good points.
Belgian
(1/3/02; 14:35:47MT - usagold.com msg#: 67630)
Silver - LBMA mistake (FWIW)
http://investor.cnet.com/investor/news/newsitem/0-9900-1028-8347395-0.html?tag=a
ts
USAGOLD
(1/3/02; 14:21:45MT - usagold.com msg#: 67629)
Black Blade, Horatio
http://www.usagold.com/gildedopinion/BakerSigns.html
Wandered by and caught the conversation:
Here's the Supply/Demand numbers as published by Leanne Baker at our Gilded Opinion page. The source is Gold Fields / Salomon Smith Barney.
darkhorse
(1/3/02; 14:04:08MT - usagold.com msg#: 67628)
Horatio
I take it you're somewhere around 65-70+ y/o if you remember rationing (I'm assuming it was here in the states). I'll be the first to admit I'm a rookie at most of this stuff, but I've learned quite a bit here and done some homework on my own...I don't see how you can logically
make the arguments you've posted. If F-N owns parts of mines that hedge, that doesn't make THEM a hedger...might not show a lot of integrity, but it still doesn't make them a hedger. And as far as gummints controlling, rationing, confiscating, setting prices or whatever...I think we all know any government can/will do whatever it thinks is best for those that run it, not what's right/best for their people. And the argument that Barrick is doing the world a favor by selling above ground supplies (thereby reducing the supposed supply overhang) and then replacing the above ground supply with mined gold...is that a Zen thing? I'll have to make an appointment for a cat scan if that sort of logic ever makes sense! Sorry, (and really no offense intended, I just totally disagree with you) but you sound a lot like that Barrick, uh, pusher at the site around the corner.
Black Blade
(1/3/02; 13:40:31MT - usagold.com msg#: 67627)
Canuck - Done Deal? Perhaps - Waiting For The Fat Lady To Sing
I am still waiting for the Fat Lady to sing. Anything is possible such as Barrick teaming up with AngloGold for another round. There was also some rumor that Gold Fields could even team up with Newmont-Franco to counter an AngloGold-Barrick tag-team. As it stands now, AngloGold would have a very tough time to finance any further bids. They probably regret selling off their Free State mines to Harmony under the recent Rand-USD exchange rates. However, if nothing new materializes in the form of a white knight, I would assume that Newmont-Franco will win the Normandy bidding war. This is a "Grim" day for the Hedge Fund miners as there is nearly a 9.5 million oz hedge book that will be unwound at Normandy. Also we should see another 1.5 million oz hedge book unwound if Harmony's acquisition of Hill 50 Mines goes through. Meanwhile, even Durban Roodeport is unwinding their hedge book as well. There is a real shift away from forward sales occurring in the mining industry. As for the Hedge Fund miners - "The Heat is On!" Cheers!
- Black Blade
Canuck
(1/3/02; 13:16:50MT - usagold.com msg#: 67626)
@ Canucks
In some 40 minutes John Ing will be on ROBTV to comment on the Newmont-Anglo battle for Normandy and the future of gold.
Canuck
(1/3/02; 13:15:06MT - usagold.com msg#: 67625)
@ BB @All
Cheers.
During the course of the day three different newschannels have mentioned the 'upped bid' of Newmont and have declared them the winners of the bidding war.
Is it a done deal, and if not yet done what would you guesstimate the possibilities of Newmont not succeeding?
Canuck
Mr Gresham
(1/3/02; 13:01:12MT - usagold.com msg#: 67624)
miner49er (1/3/02; 00:36:44MT - usagold.com msg#: 67596)
That was an amazing post! You really captured the asymptotic vision of how tiny and vulnerable the profit margins on massive trades are. And how they are operating on a "debtor in possession" bankruptcy regime. When you're bk, you might as well run up the total, 'cause it's the same penalty if you double it, and you get to play (collect salary, fees) longer.
When it (when _anything_, especially interest rates) reverses, everything seizes up at once. Instant Argentina.
(We can assume, can't we, that no one has had time to run up any such games in Euro terms, requiring ECB compromising its stability principles to rescue them?)
Black Blade
(1/3/02; 12:47:26MT - usagold.com msg#: 67623)
Horatio - Gold Supply Overhang?
OK, I'll bite - where is this Gold supply overhang at? I can't access the World Gold Council data today (that part of the site is under construction). Maybe MK here at USAGOLD could repost that data as he has several times before in "News and Views" or maybe someone here has an alternative site for Gold supply-demand tables. The demand for Gold has outstripped supply by several hundred tons for several years now, only to have that demand ultimately met by those Central Banks willing to loan out Gold to Hedge Funds and Hedge Fund miners that is eventually to be paid back (in Gold). Much of that loaned Gold is - surprise surprise - Sold by by the Hedge Fund miners! Go figure.
So really now, where pray tell is this Gold supply overhang? If anything it is an artificial supply overhang - not a physical one. The Central Banks do demand repayment. If the POG rises sharply the Central Banks will definitely want the Gold returned or higher risk margin. That is where the Hedgers have themselves trapped. When the POG rises it is Ashanti, Cambior, and Emperor all over again - and if the POG rises sharply the Hedgers are toast.
- Black Blade
"Interesting Times"
Black Blade
(1/3/02; 12:07:43MT - usagold.com msg#: 67622)
Silver firmer on speculative buying, gold steady
http://biz.yahoo.com/rf/020103/l03533859_1.html
Snippit:
LONDON, Jan 3 (Reuters) - Silver advanced to three-month highs in a nervous European market on Thursday, boosted by speculative fund buying and uncertainty triggered by an incorrect new release from the LBMA concerning delivery times. ``Trading is very much speculative at the moment. It's purely a fund-driven thing in New York...The market is still nervous about prices and forwards and that's keeping the upside pressure on prices,'' one trader said.
Others said confusion over a press release issued late Wednesday by the London Bullion Market Association (LBMA) was the catalyst pushing prices higher during the day. The LBMA said it had extended the period for physical delivery of silver between clearing members to 15 days from five working days, but subsequently retracted this on Thursday. Extending delivery times would have eased a delivery logjam, but maintaining them at five days suggests that the current administrative bottleneck at warehouses outside the UK will continue in the short term. ``...we are staying very cautious on the silver...(we) can't stay short of it at the moment and risk being caught without it,'' a third trader said. One month lease rates were quoted steady at around 19 percent on Thursday afternoon.
Black Blade: Delivery logjam, extended delivery dates, lease rates jump higher and remain in extreme backwardation. If I were short I would be worried and would cover. Something very unusual going on here. The rumors of JPMC and Citibank covering Enron Silver contracts coupled with Warren Buffett not renewing leases continue to plague the market as well. "Interesting Times"
Horatio
(1/3/02; 11:36:07MT - usagold.com msg#: 67621)
Moral delemma
Which mining company is more moral in your mind,Newmont who continues to mine gold and sells it into a market that has been in oversupply and thereby increaseing the oversupply or Barrick who sells existing above ground inventory and reduces oversupply and replaces the above ground inventory with in ground reserves.?
Who is doing more to improve the out of balance supply /demand situation?
Solomon Weaver
(1/3/02; 11:08:09MT - usagold.com msg#: 67620)
NIce summary given by Reuters....the deal is getting visibility....in the second best performing sector of last year.
CHRONOLOGY-Battle for Australia's Normandy Mining
January 03, 2002 11:12:00 AM ET
(Updates with AngloGold statement in para 13)
SYDNEY, Jan 3 (Reuters) - The battle for Normandy Mining Ltd, Australia's biggest gold miner, has provoked a fierce bidding war between two of the world's largest gold miners. The following chronology highlights the main points.
The A$ value of the rival bids, which include stock and cash, has varied in line with changes in the bidders' share prices and exchange rates.
- - - -
Sept 5, 2001 - South Africa's AngloGold Ltd launches surprise scrip bid for Normandy Mining Ltd , offering 2.15 AngloGold shares for every 100 Normandy shares.
The A$3.2 billion (US$1.7 billion) bid values Normandy at A$1.42 a share, compared with its closing price the previous day of A$1.10 a share.
Nov 14 - Denver-based Newmont Mining Corp (NEM) makes rival bid, offering 0.0385 Newmont shares for each Normandy share plus up to five Australian cents in cash. The bid values Normandy at up to A$1.70 a share.
Newmont's bid is tied in with an offer to buy Canada's Franco-Nevada Mining Corp and would make Newmont the world's biggest gold miner.
Nov 15 - Normandy says directors to accept Newmont offer.
Nov 29 - AngloGold sweetens bid with 20 cents a share cash, boosting its bid to A$1.65 per Normandy share or A$3.7 billion. This tops Newmont's offer, which has fallen to A$1.51 a share due to a weaker Newmont share price.
Dec 10 - Newmont strengthens cash component of bid, offering an unconditional 40 cents as well as scrip, valuing Normandy at A$1.90 a share. Normandy says it will recommend the bid, which tops an independent valuation of A$1.48-A$1.88 a share.
Dec 27 - AngloGold sweetens bid for second time, adding another 10 cents cash to take value of bid A$1.83 a share.
Dec 31 - Normandy says it will update its advice to shareholders by end of week.
Jan 3 - Newmont also sweetens bid a second time, adding a further 10 cents a share cash to its offer, valuing Normandy at A$1.93 a share or A$4.3 billion. Normandy recommends bid.
AngloGold later says it will not raise its offer, currently worth A$1.82 a share, saying it had no basis to justify an increase.
Source: Reuters, company announcements. REUTERS
© 2002 Reuters
Horatio
(1/3/02; 11:05:13MT - usagold.com msg#: 67619)
Hedgers
Don't be too hard on the hedgers,they have removed a great deal of supply overhanging the market.If they hadn't done that, the price might never go up and gumment would retain control of gold prices.This way the overhang is reduced and we can look forward to the day when gumment influence is reduced and market forces can resume control.
Hedging simply took some marginal mines out of production
and sold off inventory awaiting the day when a better balance of supply -demand will allow prices to rise above production costs.The hedgers didn't create the oversupply,they are simply selling someone elses inventory.That inventory existed no matter what the hedgers did.If you want to blame someone,blame the Gumment that removed gold from a reserve statis as money.Do you really think if all the mines were closed,the price of gold would go up?I don't think so !That would leave ALL the control in the gumments hands,they would set prices and ration supply.
During WW2 the Gumment rationed Coffee,Sugar,Gasoline,cooking oils,butter etc.The price didn't go up 'supply was controlled via ration stamps.
I have a vivid memory of that.
Either way the Gumment has an interest in keeping the price of gold down.It competes with fiat Dollars.
They don't want you to have an alternative to the DOLLAR.
THe whole Bond market and stock market depends on a strong Dollar.Its all about control ,and removing control from the Gumment via hedging is beneficial even if it seems destructive in the short term.
RobotGuy
(1/3/02; 10:45:23MT - usagold.com msg#: 67618)
Simpsons
My most favoured television show of all times. In one particular episode Bart's friend Milhouse holds up a bottle of medication called "Represitol." I think of this and laugh every time I see the POG lose gains.
Black Blade
(1/3/02; 10:37:40MT - usagold.com msg#: 67617)
Horatio - Franco-Nevada a Hedger?
You miss one "minor" detail here. Both Newmont and Franco-Nevada are not subject to any margin risk if the POG rises, whereas the truly Hedged miners are. Having a royalty interest in a Hedged miners operations is not the same as being hedged by any stretch of the imagination. Even Royal Gold (RGLD) has many royalty interests and they too would dispute that they are hedged. Franco (either it was Franco-Nevada or Euro-Nevada) a few years ago used to hold onto physical gold as part of their portfolio. I am not sure what your point is here. They never referred to their "forward sold" gold position in their annual reports - go figure. Cheers!
- Black Blade
Hipplebeck
(1/3/02; 10:33:59MT - usagold.com msg#: 67616)
some of my thoughts
On Argentina If the country defaults on all their obligations, and the country comes out of it OK, then won't other countries see that they too can do the same. What is the worst that can happen by a country declaring bankruptsy? They will not get invaded will they? I hope this spells the end of the IMF.
On deep storage gold. I believe that this new way of describing US gold could be a way of saying that through gold swaps, deep storage gold now represents ownership of forward sold gold still in the ground traded for physical bars.
On Afghanistan. I think there is a great battle going on for control of the Caspean oil route between Russia and the US. Russia controls the northwest and US controls the southeast. That is why the Northern alliance fighters were stopped from going south to Kandahar. The temporary president and the foriegn minister of Afghanistan are US puppets, and the rest of the ministers are Russia's. There is a great silent war being played out there. Russia has the advantage IMO and they now control both oil routes out of the Caspean region
RobotGuy
(1/3/02; 10:28:38MT - usagold.com msg#: 67615)
Black Blade --- Bone Pile
I have a gut feeling your bone pile population is going to do exactly what you say BB.
What happens when most companies get slow around Christmas? They keep people on for awhile at a cost so as not to ruin their Christmas. What happens after Christmas?
"Were really sorry to have to tell you this guys, but it looks like the "Big Boys" want to do some more chopping." I've been there, and I'm sure I'll be there again in my industry. Unfortunate, but it's the way the cookie crumbles.
Horatio
(1/3/02; 10:18:27MT - usagold.com msg#: 67614)
Newmont,Franco-Nevada are hedgers.
Franco has its hand in many mines,and with most of them they receive a royalty or what they describe as a percentage of net- smelter.In my opinion they are the smartest of all the gold mine companies.They make money as long as gold is being mined ,no matter what the cash cost is.They own part of some mines that hedge and as such thay are a hedger except that they can make money no matter what price is,as long as gold comes out of the ground.They can make money at 200/oz from thier hedging partners as long as gold comes out of the ground.That what a net smelter agreement does.
To suggest that Newmont does not hedge is inaccurate,as long as Franco gets a percent of net smelter from mines that do.Franco makes money even if thier partners loses money,as long as gold comes out of the ground.If gold goes up they make money even if thier partners don't.If gold goes down, they make money even if thier partners don't.As long as gold comes out of the ground to the smelter,they make money.
Black Blade
(1/3/02; 10:15:09MT - usagold.com msg#: 67613)
Newmont set to win Normandy as AngloGold holds fire
http://biz.yahoo.com/rf/020103/sd172899_3.html
Snippit:
JOHANNESBURG/SYDNEY, Jan 3 (Reuters) - Newmont Mining (NYSE:NEM) looked poised to win a takeover battle for Australia's Normandy Mining (Australia:NDY.AX) with a sweetened bid on Thursday, as AngloGold Ltd refused to up its latest offer.
Black Blade: Done deal? Maybe. Time will tell. Just when we were having fun too. This must be a bitter pill for AngloGold to swallow. Still there is probably a lot of backroom discussions with other Hedge Fund miners for a possible response. For now they must scramble and look for other miners to satisfy the insatiable hunger of the hedge book. "Interesting Times"
Black Blade
(1/3/02; 09:45:35MT - usagold.com msg#: 67612)
Providian to cut 800 more jobs, take charge
http://biz.yahoo.com/rf/020103/n03157107_2.html
Snippit:
NEW YORK, Jan 3 (Reuters) - Struggling credit card company Providian Financial Corp. (NYSE:PVN) on Thursday said it would cut 800 jobs by the end of next week, and signaled possible further job reductions and the sale of assets to boost performance.
Black Blade: More bankers "Bones" off to the "Bone Pile".
Black Blade
(1/3/02; 09:41:36MT - usagold.com msg#: 67611)
Jobless Claims Climb Sharply
http://biz.yahoo.com/rb/020103/business_economy_jobless_dc_2.html
Snippit:
WASHINGTON (Reuters) - The number of Americans lining up to file for first-time unemployment benefits rose sharply during the week ended Dec. 29, in a sign that the labor market remains soft, a government report showed on Thursday. Initial claims for unemployment benefits posted a rise of 36,000 to 447,000 from the previous week's revised figure of 411,000, the Labor Department said.
Black Blade: The "Bone Pile" clinks a bit louder each week as more "Bones" are dumped on the ever-growing pile of discarded US workers. This should continue for some time and even accelerate as the recession deepens. Get prepared: get out of debt, get a months of nonperishable food and basic goods, get Gold and Silver portfolio insurance, and get cash on hand to ride out a few months expenses. If you are one of the unfortunate "Bones" cast upon the "Bone Pile" then you just might ride out the storm a bit easier. If anything as long as your prepared you will sleep a bit easier at night.
Black Blade
(1/3/02; 09:32:45MT - usagold.com msg#: 67610)
Gold and Silver Higher
http://quotes.ino.com/exchanges/?c=metals
Silver is still moving higher by about 9 cents this morning. The COMEX supply is a bit higher at over 100 million oz. Of course the majority of that I believe is registered and not "supposedly" available for delivery expect to the reciept holders or unless they agree to lease their Silver. Available Silver supply appears to perhaps a bit tight still. Gold is still a bit higher after the initial shock of the higher Newmont-Franco bid for Normandy. This is not a good day for the Hedge Fund miners. There must be a lot of hurried boardroom meetings today. Oh to be a fly on the wall.
- Black Blade
Econoclast
(1/3/02; 08:39:07MT - usagold.com msg#: 67609)
Thanks Black Blade and Uponroof
For your expansions on the merger. My mind has been just "skimming" that deal as I tend to focus more on the macro issues of gold/economics as opposed to the specific going ons of a couple of the miners (that I don't own stock in). But your recent posts have clearly brought this into a more "macro" focus for me to ponder.
The world is sooo big, that we have to pick our spots.
Again, thank you for bringing this front into focus for me and us.
Waverider
(1/3/02; 08:17:22MT - usagold.com msg#: 67608)
OOps
Sorry Miner.
Waverider
Waverider
(1/3/02; 08:09:06MT - usagold.com msg#: 67607)
Lease Rates
Great posts Minor, Black Blade, Mr. Gresham, uponroof - thank you.
Re: Lease Rates - what happened to todays quotes? Is that a computer glitch?
A great day to All,
Waverider
Pizz
(1/3/02; 07:51:54MT - usagold.com msg#: 67606)
Miner 49er
Great Post
The End of the Beginning.
Re: Anglo
Had the unpleasure of working as a corporate controller for a division of Anglo American in late 80's. Their corporate philosophy is somewhere between arrogant and totally unreasonable. They hire "yes" men as CEOs and dictate the impossible and expect it yesterday. You ought to talk to their "security" people. Scared the ____ out of me and I'm Sicilian!!!!!
Pizz
Tommy P
(1/3/02; 07:19:48MT - usagold.com msg#: 67605)
From the Globe and Mail
http://www.theglobeandmail.com/servlet/RTGAMArticleHTMLTemplate/C/20020103/wnormand?hub=businessBN&tf=tgam%252Frealtime%252Ffullstory_Bus.html&cf=tgam/realtime/config-neutral&vg=BigAdVariableGenerator&slug=wnormand&date=20020103&archive=RTGAM&site=Business&ad_page_name=breakingnews-business
happy reading folks
JCF
(1/3/02; 07:18:16MT - usagold.com msg#: 67604)
@miner49er
Thank you so much
There are so many of us in "lurker" mode that really appreciate it when someone points out where to get "the basics" from the wealth of material that is around. Thanks.
Go Gold & Silver
Hipplebeck
(1/3/02; 06:46:07MT - usagold.com msg#: 67603)
To Miner and Black Blade
Thank you so much gentlemen for your hard work and selfless dedication to the education of others. I, for one, know that what I learn reading this forum are lessons that are not only priceless, but could not be found anywhere else.
I follow in the footsteps of giants.
Belgian
(1/3/02; 06:44:40MT - usagold.com msg#: 67602)
@ Miner49er
Thanks for exposing extensively *the cancer* in your recent posting. Nice work !
uponroof
(1/3/02; 06:32:06MT - usagold.com msg#: 67601)
Why Franco-Newmont must defeat Anglosoldout and Barrick
http://groups.yahoo.com/group/gata/message/840
There are numerous reasons to despise the so called 'miners' at AU and ABX, but let me just refresh your memories regarding but a few....which by the way also explains the obviou PANIC they are now oozing.
Au and ABX have always had intentions to wipe out high cost producers and non-hedgers through their gold cartel and political (WGC) connections. It would then be easy to take over those assets. Not exactly looking out for the industry at large either by their extremely hedged books, obvious ulterior motives, and pathetic attemps to justify these positions in the press.
Recall just before GATA went to South Africa for their gold summit? Here are some excerpts from a July 29 GATA report (see link above):
********
"...What reward did the presenters (GATA) receive for their unpaid efforts to go all the way to Durban, South Africa from the World Gold Council's biggest contributor, AngloGold?
Steve Lenahan, a nice enough chap, told South Africa's Business Day that ," Reg Howe is wrong on one of his charges which makes all his other claims suspect. "
Yet, Lenahan did not explain to the press nor to any of the GATA camp what Reg what he was wrong about and Anglogold has not yet responded to me about the matter.
Why did Lenahan not bring this up during the Q&A period? We were there to help THEM. To my utmost regret, I am forced to come to the conclusion that the AngloGold senior management are not only the most cowardly of folk, but they would sell their soul to the devil to perpetuate the visions of The Gold Cartel.
In February, 2001 Reg Howe and I attended a prominent gold conference in Capetown, South Africa. Well known AngloGold Marketing Manager, Kelvin Williams, launched into his presentation to an impressive crowd of attendees by mocking the "conspiracy" crowd.
I had hoped that GATA's sincere effort to lay our cards on the table in Durban would elicit some serious query and follow up probing from Anglogold because of the profoundness of what the speakers had to say.
Instead, AngloGold, the World Gold Council's single largest
contributor, used the opportunity to bash us in the South African business press.
SO BE IT. Remember those words AngloGold!
(uponroof-REMEMBER THEM NOW INDEED!)
Which brings me to the other most visible hedger, Barrick Gold.
Like AngloGold, they have taken every public opportunity to give GATA the zinger. At a New York analyst gathering last year, their spokesman said that GATA was partly responsible for their stock price's poor performance because we said there was a conspiracy to hold down the gold price. I suggest that there are other reasons that the share price of Barrick is not performing well.
The following revelation should scare the pants off Barrick
shareholders!
Harvey O sent me the following email on Friday:
"Jamie Sokalsky was on CNBC today and he totally lied about total demand for gold. He stipulated it is about 10% higher than supply.
"He was questioned by Mark Haynes and Haynes thought that central banks are supplying the excess gold to meet the demand. Solalsky said that central bank sales and leasing only represent 10% or about 250 tonnes. You could tell on the screen that he was nervous in his response to Haynes."
I happened to catch the same interview. Sokalsky was on as Barrick reported earnings a penny below expectations. I could not believe what I heard either.
This is a man who is supposed to be a NUMBERS genius. Randall Oliphant is now the Barrick President, promoted from his financial officer position. Solalsky succeeded Oliphant to that position. They have both told the investment community that their massive hedge position is 100%"bullet proof." They are on record for that statement
during conference calls and during public gold analyst presentations.
OK, maybe that is so, but Harvey O is also right. Sokalsky was either lying on CNBC or he is a dummy. According to the official statistics, mine gold supply is around 2500 tonnes and scrap supply is around 600 tonnes - for a total of 3100 tonnes. According to their own numbers, the WGC says that gold demand is around 4000 tonnes. That means that the answer to Mark Haynes' question should have been around 33%, not 10%. Frank Veneroso and GATA say those numbers are way too low.
Frank's work shows demand numbers closer to a total of 4900 tonnes.
If Frank is right, mathematical guru Sokalsky is only off by 62%. That figure is derived by dividing mine supply of 2500 tonnes into Frank's demand over supply number of 1800 tonnes, minus his 10% number.
Now, if Sokalsky can be THAT WRONG in making a statement about the supply of gold being fed by the central banks to hold down the gold price on CNBC, how wrong could he and Oliphant be about the "sancro-sanctity" of their forward sale positions? What if they are 33% to 62% off in their calculations on that too?
If they are, kiss Barrick bye-bye when the inevitable gold price explosion arrives.
********
uponroof-yes AU and ABX's days of creative bookeeping are about to end. Can't bluff people when they call your hand. Newmont-Franco are calling their hand, now it's almost time to lay down the cards. The rise in POG this morning is proof that there is going to be hell to pay. Emjoy every minute of it all you true gold longs. This is the beginning of the end for hedging.
Black Blade
(1/3/02; 01:18:13MT - usagold.com msg#: 67600)
Gold Price Rises on Newmont-Franco Bid For Normandy
http://quotes.ino.com/exchanges/?c=metals
Gold is currently up $2.65 an oz. on the news of the recent increased bid by Non-Hedger Newmont-Franco and the supposed conclusion of the bidding war with Hedger AngloGold. Once settled and forward sales positions are unwound we should see higher Gold prices. Tonight Silver rebounds 5 cents in sympathy. Barrick just may be forced to play their hand.
- Black Blade
Golden Dreams All!
Mr Gresham
(1/3/02; 01:00:50MT - usagold.com msg#: 67599)
Dan Ascani: Gold in Deflation (1998-99)
http://www.gold-eagle.com/research/ascanindx.html
Good historical perspective... Multi-part essay, I think #s 3, 8, 11 had parts echoing FOA on the Euro's threat to the Dollar via reinstatement of gold as measure of value. Get in a mellow mood, skim, and let centuries of gold's "operational wealth" wash over you (and erase these past few years of travesty).
I had a post started earlier today in response to many good earlier ones; postus interruptus, and all lost, alas...
Now to read backward...
Black Blade
(1/3/02; 00:51:11MT - usagold.com msg#: 67598)
AngloGold says studying new rival Normandy bid
http://biz.yahoo.com/rf/020103/l0355749_1.html
Snippit:
JOHANNESBURG, Jan 3 (Reuters) - The world's largest bullion producer AngloGold said on Thursday it was studying rival Newmont Mining Corp's (NYSE:NEM) increased offer for Australia's Normandy Mining (Australia:NDY.AX). ``We are looking at this and we will respond in due course,'' said AngloGold spokeswoman Shelagh Blackman.
Black Blade: Yep, the Orcs are plotting and scheming tonight. Not a lot of happy campers in the AngloGold Boardroom. Desperate times for Hedge Funds like AngloGold. "Interesting Times"
Black Blade
(1/3/02; 00:42:20MT - usagold.com msg#: 67597)
Press Release - Newmont Announces Superior Offer
http://biz.yahoo.com/prnews/020103/lath049_1.html
Snippit:
Cash Consideration Increased to A$0.50 Per Share - Recommended by Normandy Board - On Track To Close in Mid-February.
Superior Offer
Wayne Murdy, Chairman, President and Chief Executive Officer of Newmont, said, `Our bid is clearly superior to AngloGold's and provides Normandy shareholders significantly higher overall value, approximately 67 percent more cash up front and the ability to participate in the world's premier gold company.'' Based on closing prices on the New York Stock Exchange on January 2, 2002, Newmont's revised bid has a value of A$1.93 per Normandy share, while AngloGold's offer has a value of A$1.81.
Mr. Murdy noted that Newmont's acquisitions of Normandy and Franco-Nevada continue to be compelling strategically and financially. ``The revised bid does not in any way alter our plans for the new company,'' Mr. Murdy said. ``Newmont's bid offers the greatest long-term value potential through an investment in an industry leader with a diversified asset base, balanced risk portfolio, the industry's greatest upside participation in rising gold prices, greater trading liquidity, and a solid balance sheet. The royalty stream and merchant banking skills brought to the company by Franco-Nevada will contribute a solid base of stable cash flows even in a low gold price environment.''
``We intend to be a leader in the rationalization of various property interests over time for the benefit of our shareholders. However, unlike AngloGold, we will be disciplined in this process, and we will not be required to confront the disposition of important assets, such as the sale of the management of the Kalgoorlie Super Pit and the participation in the Boddington Expansion Project that are being contemplated by AngloGold.''
Black Blade: No pulled punches here! Now time for the "Hard Sell" as the squeeze is put on Gold Hedge Fund AngloGold. Normandy management tonight gives their nod to the deal. Booby Forwardsell and his Orcs are probably plotting how to counter this latest offer by Non-Hedger Newmont. Oh to be a fly on the wall! I think that the war between the Hedgers vs. Non-hedgers has yet to be fully played out, however, this A10 cent bid increase really makes it difficult for Hedge Fund AngloGold to successfully counter Newmont-Franco's offer. If Barrick wishes to come to AngloGold's rescue - Now's the time. "Interesting Times"
miner49er
(1/3/02; 00:36:44MT - usagold.com msg#: 67596)
Cavan Man @ 67497 - and the train it won't stop... goin'... no way to slow down...
http://www.prudentbear.com/Comm%20Archive/markcomm/122801.htm
Reply to your question: How did the dollar appreciate 7% this year while losing a positive yield?
Hey Cavan Man - I had the pleasure of reading Doug Noland's latest offering (link above). He says so much more eloquently and thoroughly what I tried to stuff into about 8 lines the other day as a backdrop to answering your question. I want to provide lots of preface here basically because I feel this is an important issue, and too often we answer it glibly, and all assume we all "get it," including ourselves, but do we ever really try to dissect it and become satisfied with what's really taking place?
This is not going to be the "definitive" answer, as there are several aspects that all contribute. However, this I feel is perhaps the most significant part to the overall answer in today's world, and, save for people like Mr. Noland, the least often and least adequately addressed.
I am including 4 other links to archived essays of his that each look at different components that make up the environment that allow today's credit excess and derivatives monsters to exist. Each contains follow-along examples of these components. While the essays in entirety are worth your reading, searching for the bracketed phrase will take you to the pertinent parts. They address 1) credit creation outside the banking system, and the role of money market funds (1st two links), 2) a prototypical spread trade tying overseas dollars to mortgage issuance via a hedge fund and GSEs, and 3) the miracle of transforming junk debt into investment grade using structured debt. If this stuff is not that familiar to anyone, then these examples are well worth your effort. Take your time and doodle along with a pencil as you go through them.
http://www.prudentbear.com/Comm%20Archive/markcomm/031000.htm
[In the past, when banks were the predominant intermediaries]
http://www.prudentbear.com/Comm%20Archive/markcomm/062201.htm
[The contemporary monetary system, as detailed in the past]
http://www.prudentbear.com/Comm%20Archive/markcomm/042701.htm
[Just for "fun," let's "follow the money"]
http://www.prudentbear.com/Comm%20Archive/markcomm/072001.htm
[It may be helpful to look at a recent CDO deal]
------------------------------------------------------------------------------------------------
If something loses yield, even to the point of negative real returns, but the market price of it keeps going up, then, as I prefaced the other day, either the yield is mis-represented, or there is extra hidden value perceived and priced into the instrument.
Now, our instinct and logic, as developed within the framework of our conventional teaching, tell us that such an instrument should be declining in value. In the case of the US dollar, all the charts of money supply, and credit growth are in end-game vertical assault, and we spend more every single hour than we make to the tune of $50,000,000. Even with the generously low official inflation rate, yields on risk-free dollar debt are negative in real terms. What additional benefit to using dollars is found that makes it worth people's while to hold them, even to the point that they seem to lose value? Without a commensurate increase in worthwhile goods and services being produced that can match the potential claims outstanding in all these dollar credits, then the value of these credits must necessarily decline.
Surely all these extant claims on our future production, as their holders observe their relentless and precipitous dilution, will one day invade our shores in search of something to buy like one global financial D-Day. Surely...
But time and again, that day eludes us. I maintain that there is no contradiction here. What needs be done is to stretch our concept of a "worthwhile good." Worthwhile means something whose "use" has value. As mentioned the other day, the price of something is always based on the evaluation of perceived marginal (additional) benefits vs. perceived marginal costs. Simply, if I use, consume, (eat, wear, save, hang up on the wall, invest, lend... whatever) something and I believe the additional satisfaction (real, imagined, tangible, and intangible) that I derive is sufficiently worth what I believe I'm paying for it (i.e., the cost, and again: real, imagined, tangible, and intangible), then I will be disposed to act. Therefore something IS apparently worthwhile to the scads of people who have been climbing all over each other trying to get more of these US dollar units. But just what IS it?
Now this "something" may not be worthwhile to you or me. We may not discern it in the first place. We may perceive it, but it may be beyond the scope of availability or practicality in our life situation, or we may just not fancy the thing at all.
A most amazing statistic is cited by Mr. Noland in last Friday's essay. He mentions a ratio of "structured" finance to GDP. From the article: "Nowhere is the financial system transformation made more conspicuous than with what we call the 'structured finance ratio' -- the combination of GSE assets and outstanding mortgage and asset-backed securities as a percentage of GDP. Back in 1984, $608 billion of 'structured' securities were about 15% of GDP. At the conclusion of 1994 outstanding GSE and mortgage/asset-backed securities had surged to $2.8 trillion, or 40% of GDP. By the end of the third quarter, $7 trillion of these securities were 69% of GDP and growing rapidly."
69% and rising; more than two-thirds of GDP. Astonishing! He goes on to declare that in the last 15 quarters (from end of 1997), these "structured" finance assets have increased $962.8 billion (16%), while GDP has increased only $250 billion (3%). As he exclaims, "What's going on here?"
The clue is succinctly phrased in the essay's title. After outlining several types of capital financing that are found (and even evolve sequentially as an economy matures), he maintains that in the last stages of an economy yet one more "type" of financing arises: Financial Arbitrage Capitalism.
Long having tapped productive enterprise opportunities for all they're worth (and some...), financing evolves into non-productive betting on the inevitability of convergences, or pricing ingeniously devised contingent claim abstractions. Rest assured, all these new dollar credit units ARE being spent, and literally as fast as they are created (via their digital engines, and transport networks). They are being spent on something the buyer perceives to gain him additional benefits that adequately exceed his perceived costs in undertaking the transaction. The benefits from his bet are esteemed worth enough to take on the risks of making the bet. The bet is the "worthwhile good" produced.
So far so good... not really different from the concept of any investment, and we already know that our hemorrhaging current account deficit is kept in check by subsequent flow into and surpluses in our capital account. But why the gadzillions of dollars that kept on coming in? Certainly a point of diminishing returns is (has been) reached? Well, if these were just straightforward shareholdings, or credit lending investments, or simple variations on those themes, then this could not happen. Today's environment could not sustain the flows we are facing. The costs are too high, and the returns are too low. What is it about these bets? These trades? These coveted "worthwhile goods" that our US dollar economy produces?
Arbitraged trades are conceived like this: divergences are found in the pricing of securities that have something they both revolve around (i.e., something that you can "peg" them to). Complex mathematical modelling and statistical analysis calculates your risk and return. These models are so good (provided nothing really breaks), you can be "guaranteed" of the outcome. The profit margins on these "guaranteed" bets -- bets that the mispricings will converge, or that prices will continue to move as your "peg" indicates -- are necessarily very, very slim (what do you want, everything!?). So to make anything on them, you must make very, very, very big bets. A 10 basis point spread on a 3 month trade gets me a dime for every $100.00 (before taxes and commission). Say the typical individual puts in $1000 to, oh... $100,000. 3 months later their returns range from $1.00 to $100.00. Not the stuff that makes The Street buzz...
But what if I commit, say, $1 billion? 3 months return: a respectable $1 million. No hassles, no worries, none of the endless vagaries that press against you daily with your conventional investments. Just the purr and hum of other-worldly mathematics executing flawlessly under the raw power of contemporary computer technology instructing you what to do.
Now since we don't generally have a billion dollars just sitting around in the sock drawer, we must somehow finance our bet. So we go to our local broker, he gets a few parties together to loan us the money, and presto, we are now the proud parents of a bubbling baby hedge fund (pun intended). Now grant it, my 10 bp spread would be uneconomic once we include borrowing costs as well, so more realistically we might be working with a few basis points spread after borrowing costs. (Big guys also set themselves up to avoid taxation, and can usually get a better deal on commissions, too.
Two problems arise however: 1) others want in on the trade once it is figured out, and attempt to copy the bet. This narrows the spread as the trade becomes "crowded." You must now either commit more capital to the same bet (e.g., if spreads narrow from 10 to 5 bp, you will now need $2 billion to leverage the same returns), or you must seek greener pastures; i.e., another bet. Well just as the quest for productive new business opportunities soon results in less viable propositions, so the search for mis-priced securities soon leads to riskier ventures.
In both cases there is one overarching requirement: the need for ever more and frequent helpings of gargantuan credit -- liquidity. And as each bet is made, and new credit created, this credit is used for the basis of yet additional new credit And in the typically non-banking world in which this takes place (hence without reserve requirements, and so on), this credit created on top of credit can approach endless proportions -- ref. Doug Noland's "Infinite Multiplier" effect. Thus as the deal comes to an end, you better find something to roll these funds into, lest giant credit contractions risk convulsing the markets. And by the same token, the people who had so much fun making "free" money, will want to return to the gaming table as quickly as possible, anyway. So you better have a game to play.
But as the bets get more crowded, and spreads get thinner, and new bets pioneer even riskier frontiers, ever cheaper financing becomes incumbent to the stability and ultimately the survival of the system. The lender of last resort is sought for this ever cheaper fix. And at this juncture, lend he must, and lend he has, and lend he shall continue to do -- and in spades...
This is why the U.S. cannot share its currency's principal reserve status. It cannot share with the euro and continue to expand like this -- unchecked and unabated. It cannot stop expanding ever again. It cannot even slow down the rate of expansion, or keep the status quo. If it raises rates it not only contracts the system, but removes its well-telegraphed peg of continually lower rates, and thus risks blowing gadzillions of dollars notional into the herafter and throwing the markets into uncertainty. If it reduces its various market operations that introduce "temporary" and "permanent" additons to the system, then new bets can't get funding; crowded bets can't increase exposure to compensate; bad bets pleading for another day have nothing to roll into; and riskier bets become too risky. And if anyone of these falters, the credit contraction dynamics that would take place would risk seizing the system like an unoiled lawnmower attacking buffalo grass in the Texas summer.
So, this is one explanation, anyway, of why the US dollar can keep expanding into oblivion, yields go negative, and yet the markets still can't get enough of them. This unique property of its "use" value, namely that it is deep and liquid enough to sustain unfathomable mountains of arbitrage financing, permits the "production" of seemingly endless amounts of "worthwhile" (profitable) financial goods that the buyers still perceive to be worth the buck. At least that's how I see it from the back row of the cheap seats...
Good night, I'm tired...
miner
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