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[Three points]
Gold's 2000-year history not likely to be turned around in 20 years
Gold industry must take responsibility for gold
Gold price rising as global risk profile deteriorates


The Gold Business: Myths and Realites
Paydirt Conference ­ Perth, Australia, March 2002

by Ian Cockerill, CEO Gold Fields


Gold Fields is one of the world's largest gold producers, with output of some 4.5 million ounces annually. Its African operations are concentrated in Ghana in West Africa, and in South Africa's famous Witwatersrand Basin. Further afield Gold Fields owns the St Ives and Agnew gold mines in Western Australia. The group's exploration activities for gold and platinum stretch from Africa and Australia to Europe, and North and South America.

Today I want to talk about a few of the myths about the gold industry, but in the process I would like to give you my perspective of reality as I see it in the business today.

Myths about gold as a reserve asset

The first myth that I want to talk about is the overarching and fundamental myth about gold as a reserve asset. Has gold lost its status as an investment of last resort in times of insecurity and crisis?

If you look at this graph, which shows the gold price from 1980, one sees a steady decline from the highs of US$800 to well below US$300 recently. But we need to look at this graph in the context of history in order to understand what happened to gold and to form an opinion on whether gold has in fact become just another commodity.

The big red arrow points at 11 September 1989. Many of you may remember this as the day when the Berlin Wall came crashing down and East Germany started its spectacular collapse. This was followed in short order by the demise of the old Soviet Union and the end of the cold war.

It was a seminal date in a decade long and gradual unravelling of the Soviet Union and its sphere of influence. After 11 September 1989 the world would never be the same again.

What followed was a new world order with the United States of America assuming the mantle of lone super power, imposing on the world, its version of global stability, peace and prosperity. Any threats to this new order were dealt with in a surgical and clean manner, principally by a coalition of Western Powers, led by the United States. The Gulf War is an example of how the world was managed in a "smart way", the "American Way".

This was the era of the Peace Dividend, the era during which the mighty dollar ruled supreme against all other currencies, including gold. From a Western perspective the world had become a much safer place and a whole generation of people grew up expecting peace and prosperity as their birthright.

During this period we saw sustained global economic growth. This growth was unique in that it took place in the absence of significant inflationary pressures ­ gone were the boom and bust cycles of yesterday. Buoyed by this growth, stock markets soared, lifting people' sense of worth and security to levels of "irrational exuberance". Against this backdrop it is hardly surprising that we saw the gradual decline of gold as a reserve asset.

This graph, courtesy of John Hathaway of Tocqueville Asset Management, shows the Dow Jones relative to the US$ gold price since 1915 to the beginning of this year. What it illustrates is the inverse relationship between times of strong economic growth and gold. It also shows the period of unprecedented economic growth that we have seen over the past two decades.

We are today at the high point of the last cycle on the graph.

The big question is, what lies ahead? Is this graph simply going to continue its upward trend into the future, or are the forces of history going to return to the equation? My sense is that gravity is about to kick in ­ what goes up must come down. In fact, I am of the opinion that this process is already underway.

For more than 2000 years gold was viewed by generation after generation as a safe haven in times of crises. Gold was an insurance asset, in fact, for much of the time the only insurance asset. 2000 years of history is not wiped out within two decades. This wave of global prosperity cannot continue forever, and I believe, history is busy proving that right now as we speak.

Let me explain. The past two decades of Western prosperity have in fact spawned the seeds of the next dramatic change in the world order. During the past two decades we dealt with any global problems the "smart way": (The Gulf War, Somalia and Bosnia). But, generally, if the problem was not close enough to home or enough of a threat, we ignored it.

As a result we saw Africa and many other parts of the world being marginalized. We have seen growing polarisation: between East and West; between North and South; between Christians and Muslims, between the have's and the have-not's.

Virtually undetected and very gradually, over the past four or five years, a new uncertainty has crept back into global affairs:

· Global economic uncertainty reared its head, first in Asia, then in Mexico, Argentina and now Japan;

· Conflict escalated in the Middle East and is threatening to flare up again in Iraq;

· China is slowly but certainly waking from its long slumber and is relentlessly on the march to super power status, to rival the United States;

· The division "the West and the Rest" is now more pronounced than ever. The have-not's are starting to claim an audience. Examples include boat people arriving on the Northern shores of Australia; refugees streaming from central Africa into South Africa; and the violent opposition to globalisation experienced during the past 24 months.

· Global terrorism has taken on an entirely new and ominous dimension.

We are no longer a world at peace with itself, we are a world in conflict with many faceless enemies who are hard to identify or pin down.

It is against this canvas that 11 September 2001 occurred. Like the fall of the Berlin Wall, on the same day in 1989, the attacks on the World Trade Centre in 2001 will be remembered as a seminal and definitive event in World history. Like the first incident, the second was not the turning point, but rather a symbolic milestone in the advent of a new world order - a wake-up call to the West.

With this in mind, lets turn back to our graph of the gold price over the past two decades. One can see this slight sting in the tail. I want to focus in on this period.

During March 2001 there was a turning point in the price of gold. What you see from here on out is a gold price coincidently testing new highs and concomitantly creating higher lows.

We are seeing a new trading channel, with a general upwards trend, developing. In my opinion, this is a systemic response to the increasing risk profile of the world. Over this period we have seen an upsurge in interest in gold from retail investors, especially in Japan and Germany as well as institutional investors world-wide. Are investors returning to gold because they are nervous?

This gentle upward trend is magnified in the stock prices of the major gold producers over the same period, especially those who are unhedged.

To me this signals that more and more investors are taking defensive positions in gold ­ the so-called and much maligned flight to quality. Which brings us back to our original question: has gold lost its status as a reserve asset? My answer to that is an unequivocal no.

The big question that one now need to ask is the following: Suppose I am right, and the gold industry is poised for a broad based demand driven revival, where is this gold going to come from?

Myths about supply and demand

And it is in this arena of supply and demand that the next suite of myths about the gold industry reside.

Despite the fact that demand outstrips new mine supply by over 1000 tons per annum, the world remains at ease that this supply deficit will always be serviced from new mine supplies, supplemented by Central Bank sales and producer hedging. There are other forces at work here that deserve some attention and should be seen as further evidence of the new market developing for gold.

Against the socio-political background of the past two decades, there have been some fundamental changes in the gold business, brought about primarily by the sustained period of a declining gold price.

As margins came under increasing pressure, there has been very little investment in reserve replenishment, and expenditure on exploration decreased dramatically, especially since 1997. In addition to this there has been a significant degree of high grading of reserves.

Several analysts around the world have done research on the reserve positions of gold producers and it is a common theme that existing reserves are significantly overstated at current prices. Included in current reserves there are a number of projects, representing a sizable chunk of reported reserves, which are unlikely to proceed unless we see a marked and sustained increase in the gold price.

This becomes an issue when one realises that, at current production rates we are mining between 75 and 85 million ounces of our reserves every year, and we are not replacing them. Current global reserve life sits at about 10-years.

From research that was done by the Beacon Group out of Toronto, it is clear that new mine supply is diminishing rapidly. In this graph 2001 production is indexed to 100, which represents 83.5 million ounces of annual new mine supply. The lower line represents production from reserves as currently stated and the upper line includes potential resource conversions. Either way, it is clear that, over the next few years, there is going to be a rapid and substantial decline in new mine supply of gold, at current prices.

You may argue that there are sufficient projects in the project pipeline to make up for the decline in production and reserves. Research shows that the ten best projects in the global pipeline will at best, and given a substantially higher gold price, add only about five million ounces of production annually. This is not even remotely enough to fill the gap! In order to do that we need a gold price moving into the mid-US$300 per ounce, sustained for a significant period of time, on top of which we need at least two years to construct the new projects.

If we are living in an era of renewed interest in gold as a reserve asset and, if new mine supply and reserves are indeed going to decline as rapidly as I am presenting to you, where are we going to get the gold from?

Myths about hedging

With new mine supply effectively ruled out as a source to make up the deficit, there remains only two further potential sources of gold: hedging and central banks, both of which happens to involve probably the most complex set of, not only myths, but smoke and mirrors, in the gold industry. Lets deal with them in turn.

One of the most important facts about hedging that one needs to understand is the following:

· In a declining gold market, hedging is a source of supply onto the market.

· Conversely, in a rising gold market, hedging rapidly turns into a source of demand for gold, as producers scramble to cover their positions.

It is now common cause that, with the low interest rates, the declining contango, and the perception of higher prices to come, many traditional hedgers are re-evaluating their policies with regard to hedging. One only has to look at how, for example, the Australian hedging positions have declined in the last quarter.

This graph gives one a sense of the Industry's forward curve. It illustrates not only the magnitude of the ounces committed in forward sales and call options, but clearly illustrates that, for the next few years, the forward price is but a hop-skip-and-a-jump from the current spot price.

At Gold Fields we track approximately 90% of all gold hedge books around the world on an ongoing basis. Let me give you an insight into some of the conclusions that we have reached:

· With currency movements over the past 6 to 12 months, and at the current gold price and exchange rates, a significant proportion of global hedge books are under water for the next few years;

· At a gold price of US$312 per ounce and at current exchange rates, the non-US gold book goes underwater. This is exacerbated for some producers by currency hedges that are also under water;

· Ironically, at higher gold prices some balance sheets start to deteriorate rapidly, owing to the marked to market values of their hedge books. You might argue that being "margin-free" ameliorates the situation; then again, the Bankers may not.

What this demonstrates is that there is no free lunch. The hedging of previous years is now coming home to roost and companies who have pawned the family gold, may have to face serious challenges and tough questions from shareholders.

But it is not only the hedged producers who are facing the music. At levels above US$312 gold price, the entire hedging food chain is at risk, including the bullion banks.

I think it is fair to say that, in this scenario one should not expect any Bullion Bank or Central Bank to extend to a producer with a hedge-impaired balance sheet, the luxury of even more hedges. One knows that the hedging game is over when the Bullion Banks start to get out of the business, as we have seen recently.

What this also tells us is that you should not be surprised when, from time to time, Central Bankers pop out from nowhere to talk an overly exuberant gold price back into its upward trading range, as we recently saw from the Bundesbank.

I propose to you that, in this one-year old rising market, hedging has the potential to become a potentially explosive contributor to gold demand, as companies close out their hedges. Together with the changing socio-political environment and declining reserves and production, hedging ironically, may well become one of the principal drivers of the recovery of gold as a reserve asset.

Myths about central banks as a source of supply

That leaves only the Central Banks as a potential source of supply through sales couched as adjustments in the composition of their reserve assets. And myth has it that Central Banks are hell-bent on getting rid of all their reserves.

In reality, however, it is not that cut and dried. The Washington Agreement is still in place and will remain so to the end of 2005. This limits Central Bank sales to 400 tons of gold per year.

While there is an academic possibility that they may decide to not renew the Washington Agreement for a further five years, indications are that they will. One just needs to do the arithmetic to understand why. If the gold price were in a sustained upward trend as I am suggesting, why would anybody sell gold today which they know will be worth more tomorrow?

Furthermore, as a Central Banker it is a relatively easy decision to sell gold when gold is in a downward cycle and better returns can be found elsewhere in the global economy. It is not such an easy decision when gold is on an upward trajectory and outperforming all other currencies, as it has been doing for the past year.

The logical conclusion that one must come to with regard the supply and demand equation for gold is, in a rising market, the propensity for the traditional sources of supply (new mine supply, hedging and Central Banks) to fill the growing deficit, does not look that great.

In addition to the squeeze on supply, which I have described, one should also take cognisance of the renewed efforts of the gold industry to stimulate demand for gold, not only for jewellery, but also for investment purposes. Within the next few months the Industry, through the World Gold Council, will be unveiling a new securitised bullion instrument, tradable through the regular trading channels, which will make it possible for investors to buy and hold physical gold as an investment. This should have a measurable impact on the demand side of the equation.

If everything that I have said today turns out to be reality rather than myth, then the Gold Industry has a very interesting time ahead of it.


To recap, I am suggesting that the outlook for gold has changed:

· We are seeing a gradual but marked change in investor sentiment towards gold and a simultaneous return of gold to its 2000 year old status as a reserve asset, driven by the changing global socio-political environment;

· There is a growing new mine supply deficit;

· We have less gold coming onto the market from hedging;

· Central Banks may be less inclined to sell their gold in a rising market;

· We may see greater demand resulting from the close-out of hedge positions;

· There is bound to be an increase in jewellery and investment demand as a result of gold marketing through the World Gold Council.

All of these factors together have the makings of a new bull market in gold. As they say in the movies, if it walks like a bull, and talks like a bull, then a bull it is.


In conclusion ladies and gentlemen, should the scenario that I have sketched continue to unfold, how must the gold industry prepare itself for this possible new era in gold? While I am sure that every one of you will have your own take on this, let me share with you some of my thoughts.

The principle response of the gold industry should be to take responsibility for gold and the gold market, because if we don't do it, nobody else will. This is a role that the Central Banks used to fulfil in the past but now seem to have abdicated.

If we are to be successful in taking on this promotional challenge, we cannot rely on a few producers to do the job alone. Each one of us, who have our fortunes tied to that of gold, have a role to play in nurturing and promoting our product.

Ladies and Gentlemen, I believe that the gold market is about to experience a renaissance. As an industry we should join together to promote to investors, consumers and central banks alike, a compelling case for gold.

by Ian Cockerill, CEO Gold Fields
April, 2002

Gold Fields Limited
Investor Relations
North America:
Cheryl A Martin
Tel: +91 303 796 8683
Fax: +91 303 796 8293
e-mail: camartin@gfexpl.com
Website: www.gold-fields.com

Copyright © 2002. All Rights Reserved.

Reprinted by USAGOLD with permission of the Company. Further use without consent is prohibited.

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