Untitled Document
Coins & bullion since 1973


Little Faith, Not Much Hope and Too Much Charity
Reflections on forward sales of mine production

by Julian Baring

Printable Version


Luncheon Speech to the
European Gold Mining Investment Forum
June 10, 1997
Geneva, Switzerland

I was a bit shocked when Michele [Ashby] asked me to speak at this conference. Shock turned to horror when I realised that my audience had been given Hobson's choice -- listen or no lunch! I hope the invitation did not deter too many potential attendees because my views on certain aspects of the gold industry are well known and not much loved by many of you. Furthermore, I run the risk that if I speak my mind, I may be accused of biting the hand that has just fed me. I can't believe there are many people here who can stomach the thought of sitting through even a variation of my usual theme. I therefore promise to be brief - the greatest quality in any speaker.

So here we are, yet again, going through one of those seemingly endless periods of penury which have been the lot of gold miners since time immemorial. Before we can once again enjoy the fruits of our labours on a sustainable basis, we have got to move heaven and earth to get gold out of the hands of those who do not want to own it and into the hands of those that do. I hope it won't spoil your lunch when I tell you that in order to achieve this, we need a lower gold price!

Last year I visited India for the first time, and I asked my taxi driver how much gold Indians gave as a dowry. His reply was as interesting as it was unexpected: "As much as we can afford." Obviously, the lower the price, the more gold they can afford. Since India is already the largest consumer of gold in the world, we must all pray for that country's continued and growing prosperity, because if our prayers are answered, they will be able to afford more of it. We, in this room, must continue to play our part in encouraging consumption by doing all we can to depress the gold price. No one should underestimate what we have already achieved in this regard. We have done much already, but we must do more!

Our efforts to make gold more affordable have already born fruit. The low price has resulted in some 800 tonnes more gold being consumed than the gold miners can produce each year. The trouble is that if we go on as we are, it will still take more than a generation for the Central Bank's stocks to be depleted and for the laws of supply and demand to reassert themselves. Most of us cannot wait that long! We have got to try harder!

If we want to encourage the transfer of gold from those who wish to dispose of it to those who wish to acquire it, we must at all costs avoid a repeat of the state of affairs which existed in the late 1970s and early 1980s. In those days, when the purchasing power of gold reached unprecedented levels, we never read about Central Banks lending or selling their gold. Mining companies did not sell forward for fear of the price going higher. Now they are selling forward for fear of the price going lower! A self-fulfilling policy if ever they was one. But what really helps to keep the gold price affordable is the powerful message that the producers broadcast about their own perceptions as to the direction of the price. No one in his right mind would sell gold forward if he thought the gold price was going to rise. Investors in gold and gold shares have received that message, loud and clear, and have acted accordingly.

If we want to keep the gold price low, the last thing we must do is to encourage investors to buy it. Investors, as well all know, are nervous creatures who hate buying things that are freely offered; they much prefer to buy into a shortage. At the risk of seeming sexist, I should point out that this preference is largely a male preserve. Men seem to think that if something is cheap, there must be something wrong with it. Women, on the other hand, think if something is cheap it might be a bargain. In the later 1970s, when gold was expensive, it was hard to find an investor who did not have some gold in his portfolio. Nowadays it is hard to find one who admits having any. But women can't get enough of it. The World Gold Council did a survey once and what do you think they found? The women who want more gold most are the women who have most gold!

One of the best ways of discouraging people from investing in gold is to hold conferences like this. These conferences give the gold industry an excellent platform from which to blazon to the world their aggressive expansion plans. The raison d'être for these conferences is that they give the producers an opportunity -- which they are actually willing to pay for -- to impart the message to prospective investors that gold mining is a growth industry whose glittering prospects are based on a massive expansion of reserves, resources and production, past and future. Needless to say, past performance is made to pale into insignificance compared with what lies ahead. We fund managers are obliged to point out that past performance is no guide to the future. In the interests of fair play miners should be required to do the same! The fact that growth in reserves and production have not, in the main, been accompanied by a commensurate growth in earnings per share, is of no greater relevance than the fact that the Emperor wore no clothes.

As you know, almost nobody noticed that the Emperor was as naked as the day that he was born. But there is now reason to believe that one or two eagle-eyed investors have spotted something which frightens them. Rather than buying the shares of the producers every time they hear about a company's growth potential, investors now seem to be selling them. In other words, the message has not changed, but the reaction to it has. The industry now finds itself in something of a hole. The best advice for someone who finds himself in a hole is to stop digging.

If we really believe that it is in the long-term interests of the gold-mining industry to have the lowest possible gold price in the short term, it obviously makes sense to tell everyone that your mission is to produce more and more of a product which, judging from the price, is already in over supply.

You must keep telling the world how much you are spending on exploration and then that your finding costs are less that $15/oz. They can work out for themselves how many extra ounces the market is going to have to absorb in the future. No one ever asks why, if it costs so little to find an ounce of gold, gold is not a base metal like copper? All we know is that exploration expenditure has resulted in a exponential growth of the four categories of ounces, some of which are for real, others imagined. The categories are as follows: Proven and Probable ounces, Possible ounces, Blah-blah ounces and Yet-To-Be-Discovered ounces. Strange to relate, Blah-Blah and Yet-To-Be Discovered ounces are often valued more highly by the market than Proven and Probable ounces! If you doubt me, ask the shareholders of BRE-X.

So to the producers I say, don't be shy about publicising the sacrifices your shareholders are making, in order to achieve the speedier transfer of gold from those who have it to those who want it. At the last gold conference I attended, I could not restrain myself from asking one of the presenters whether he had perhaps omitted one of his slides by mistake. He had shown a number of charts going from the bottom left-hand corner of the page to the top right, demonstrating the growth of his company's reserves and production. What was lacking was a chart showing the corresponding growth in profitability and it was that chart that I thought might have been mislaid. I think it is right that a wider audience should be told how painful it is to be a shareholder in this industry and how much they are suffering for the cause of lower gold prices. Shareholders themselves are only too well aware of this.

I speak from the heart since it is mainly my fault that Mercury Asset Management is one of the world's largest owners of gold-mining shares. We call shareholders, shearholders, at Mercury, because we are fond of the saying that if God had not intended shareholders to be sheared, he would not have made them behave like sheep!

We have watched with interest how shareholders have reacted to the announcement of forward sales by mining companies. You would have thought that if such sales were as beneficial to shareholders as the mining companies say they are, their shares would go up every time a forward sale was announced. But that has not been the case. Shareholders are clearly taking the view that in order to keep the gold price down, forward sales are a necessary evil which must be born with fortitude.

The same can be said about the reaction of shareholders to mining company presentations. Presumably the presentations are designed to achieve the expansion of the shareholder base and thus the share price. They certainly used to achieve that end, but now for some reason the same type of presentation seems to be having exactly the opposite effect. I wonder whether those of you who are responsible for investor relations have noticed this.

People keep asking me when they should start buying gold shares again. Of course I don't know, but I have a pretty good idea. We at Mercury have battled for reform in various parts of the mining industry over a number of years, sometimes with a fair measure of success. The one battle which we have fought and decisively lost has been our battle with the gold miners against forward sales. [Randy's note: please recall that this presentation by Mr. Baring was given in 1997. How miner attitudes have changed! Or have they? All eyes remain on the mining CFOs as the gold price rises.] Not only have we been seen off with our tails between our legs, but with the advantage of hindsight, it is now clear to us that the mining industry has been far more skillful at predicting the trend of the gold price than we have, and to prove it, they will tell us how much they have saved their shareholders by their actions.

In my experience, people buy gold shares with a view to making as much money as possible rather than losing as little as possible. In other words, they buy gold shares when they think the gold price is going up. Since the miners have shown themselves to be so adept at predicting the direction of the gold price, I simply advise people not to buy gold shares until they see the gold-mining industry unwinding their forward positions. That will be as good a sign as any I can think of that the pain we are suffering is nearly over.

Having paid tribute to the gold miners for their efforts to keep the gold price affordable, it would be churlish not to acknowledge the contribution of the Central Banks to that cause.

But for the Central Bank's willingness to lend their gold to people who subsequently sell it, the price would probably be a lot higher. Since Central Bank gold is valued in the books at a price which bears no relation to reality, it does not matter to them what effect their actions have on the price. Even if they decide to sell it at today's depressed price, they still make a huge profit. [Randy's note: as of 1999, this condition has fundamentally changed with the European Central Bank's adoption of the practice of booking its gold reserves at prices which are marked to market values quarterly.]

Personally I have never worried too much about potential Central Bank sales. First, if history is anything to go by, the timing of Central bank sales of gold is one of the best contrary indicators you will get. Secondly, Mrs. Thatcher taught us that people are quite prepared to buy what they already own if the price is attractive enough. The prospect of a large seller is always conducive to achieving that. Furthermore, the disposal of State assets gives rise to juicy commissions which are the lifeblood of the larger financial institutions. Would it surprise you to hear that the major Swiss Banks have already been in touch with the Governor of the Swiss Central Bank to ask if they could be helpful over the proposed sale of the Swiss gold? It certainly would not surprise me! It was not so many years ago that, as a matter of policy, every Swiss-run portfolio contained 10% in gold. Faced with having to find a home for Central Bank gold, don't be surprised if that policy is revived. Once large institutions which have not previously been actively involved in a market become involved, that in itself enlarges the size and depth of the market.

There was a nasty moment a week or two ago when the German Government was talking about valuing its gold at a price which bore a more realistic relationship to the market price. This is the last thing we want to see! [Randy's note: In keeping with the tenor of this entire speech, please note the tongue firmly in cheek.]

If Central Bank gold was valued at the market price it would discourage Central Bankers from dong things which might adversely affect its value. We can now heave a sigh of relief that the uproar which was caused by the proposed revaluation of the German Gold reserves will probably deter other Governments from tinkering with theirs. No one seems to have noticed that gold has been demonetised for over 20 years. What on earth is all the fuss about! In fact the public's interest in gold reserves has suddenly been aroused in a way that even the World Gold Council could never have engineered.

And speaking of the World Gold Council, I can't refrain from pointing out that the industry is paying more than $2/oz to support an organisation, the sole purpose of which is to increase the demand for gold. I thought we had decided that what was required was a lower gold price, not a higher one! Perhaps this is why there are a number of major producers which have decided not to belong to the World Gold Council nor to support its efforts. But surely it is only fair that those, who receive more than the market price by selling gold they have not yet produced, should finance the organisation which has to find a buyer for it. Those who do not depress the gold price by selling forward have already done their bit and should therefore not be required to pay twice.

Sitting between the miners and the Central Bankers are the Investment Banks. They facilitate the process of lending gold from the Central Banks to the miners so that the latter can sell it at lower and lower prices. It is, of course, in the interest of the middle men to talk the price down. It encourages both the lenders and sellers to act quickly before the price goes lower. They know full well that a commission today is worth more than one tomorrow. There is no contango on commissions!

Mining is a relatively harmless activity, which gives gainful employment to a lot of people, often in remote areas. Whether or not it is a profitable occupation does not seem to matter. Miners are like moles -- they are not motivated by profit. They just like digging. You can't stop them even though they may be approaching a mole trap.

Central Bankers may consider themselves more sophisticated than miners. But by seeking to earn a return, however small, on their gold reserves, they are helping to make gold more affordable. It makes you wonder whether they ever consider foregoing the income on a small portion of their reserves in the interests of enhancing the capital value of the whole.

So, speaking on behalf of those billions of people who live East of Suez, it remains for me to thank each and every one of you who have contributed, to a greater or lesser extent, to making gold more affordable. Speaking selfishly as a shareholder, I wish you would stop. If you will, I will.

Thank you for your attention.

This article reprinted at USAGOLD with permission.


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