The FT World Gold Conference
The Financial Times kindly invited me to its World Gold Conference in Venice last June and I am grateful for its hospitality. It was my first Gold Conference so I have no benchmark by which to judge it.
However, I can say that the venue was great; the Excelsior Hotel on the Venice Lido in June is not to be sneezed at and must have had something to do with the record turnout of nearly 500 participants. Sadly, the weather was not at its best: St Mark' s Square was under water for part of the time and floods in the Friuli region to the north prevented the grower from putting in an appearance at J P Morgan's excellent wine-tasting on the island or Porcello (but not to worry, the wine arrived and we went ahead with the tasting anyway) .
Even so, a conference that attracts nearly 500 eager attenders must have something going for it: it was significant that most of them turned up for the second morning' s presentations, which from my experience of other conferences does not happen that often. However, the success of a conference hinges as much, if not more, on attracting the right people, which means the ones you want to talk to, as on its subject matter. Here the FT may have a problem: plenty of bankers, of both the commercial and central persuasions, and a good sprinkling of miners and refiners, but investors were outnumbered by a factor of plenty.
Nevertheless, organisation, content and presentation are obviously also vital. So far as I could tell the organisation was faultless, though I daresay those who were doing it would own up to swan-like tendencies - all serenity on the surface, working like hell underneath. The subject matter was comprehensive and the format - individual presentations with slides, some panel discussion and some good contributions from the floor - conventional. The chairman ship, shared by Robert Guy of NM Rothschild and James Riley of Aron, was suave, professional and entertaining in roughly equal proportions.
If I had a thought to offer to the organisers, it would be that they might explore the scope for getting away from waterfront coverage in favour or highlighting and examining in greater depth a smaller number of themes. Easy to suggest; perhaps difficult to put into practice.
Even so, some issues clearly featured more prominently than others and I shall report on two of the more obvious of these - the great hedging debate and the role of central banks.
On the level of hedging, past and future, Ted Reeve of Scotia Capital Markets took the view that it was likely to rise and to go longer. In North (America, despite the well-publicised partial liquidation of forward sales by two major producers (subsequently - and with rather less fanfare - partly reversed), two others had increased their hedging activities. At the same time, hedging by Australian producers, in proportional terms the largest hedgers, was also on the rise, as was that by the South Africans, who at present had a considerably smaller proportion of their output hedged.
Why this trend was likely to continue was made clear by Mark Keatley of Ashanti who pointed out that hedging made a substantial contribution to the cash flow that mining companies needed to carry on their business. They tend to spend about $0.5bn a year - $2bn on developing existing mines, $0.5bn on exploring for new ones and $2.5bn on buying other mines. So, they have been spending more on buying each other than getting the stuff out of the ground. Where was this money coming from? It was gratifying, said Keatley, that S2.9bn was corning from internal sources. This represented $40 per ounce of gold sold. The rest came from gold loans, shares and convertibles.
Hedging, therefore, had become a source of finance in its own right, providing a significant enhancement to the producers' income stream. It had been decisive in underpinning the financing of some of the biggest projects currently being undertaken and, therefore, done in an appropriate way, underwrote the growth of the industry.
This was Mark Keatley's answer to the question put by Geoffrey Campbell of Mercury Asset Management: Do Shareholders Matter? His answer, of course, was yes, because they provide large amounts of capital. Hedging, in his view, gave the wrong signals: in preferring cash to gold a company was suggesting it lacked confidence in the future of the very metal that provided its life-blood. In addition, hedging tended to conceal the signposts and remove the discipline of fragile economics from mine managers.
Turning to the activities of central banks, James Cross of Crosswords Research and Consulting gave a detailed analysis of the role of central banks in providing the market with liquidity. While total central bank gold holdings had fallen slightly in the 1990s, from 35,792 tonnes in 1990 to 34,585 tonnes in 1995, with the drop more than accounted for by developed countries, the number of central banks participating in the lending market had almost trebled and the volume of the market had more than doubled. Even so, the volume of 2, I 00 tonnes still represent ed well under a third of the 7,900 tonnes of gold held by the active central banks (and obviously only a small proportion of the total of 35,000 tonnes held by all central banks). For the future, James Cross considered it likely that central banks would be more active in managing their resources, including use of the gold deposit market. They were also likely to be more responsive to price and interest rate changes.
In an entertaining and colourful analysis on the Differing Impact of Higher Leasing Rates on All Market Participants, Andy Smith of UBS reached the same conclusion. Central banks were likely to respond to higher lease rates with more lending, so there was no need to be worried by the prospects of a gold famine.
Finally, Robert Rubin of AIGTrading Group speculated on the implications of EMU if and when it happened - and he thought it would, albeit with a limited number of participants. He saw confusion in the market which needed clarify, and a number of myths which he sought to dispel.
He also threw in IMF gold auctions and put the view that they would become part of the landscape despite current opposition by some countries.
By contrast, however, he saw the birth of the European Central Bank (ECB) and what it all meant for gold as having everyone rattled for the next few years, but that there was probably less than meets the eye for gold in all the ECB machinations.
There were many other excellent presentations. Tom Main of the Chamber of Mine s of South Africa claimed that the demise of the South African mining industry had been greatly exaggerated and that it could be in for a renaissance. The growing Asian market featured in presentations by Michael Kile of the Gold Corporation of Australia and Raymond Chan Fat-Chu, the newly elected President of the Chinese Gold and Silver Exchange Society. Asia also featured in Philip Klapwijk's (Gold Fields Mineral Services) presentation on the Gold/Silver Relationship, warning that there were dangers in the short term of excessive market reliance on Asian jewellery demand.
A report such as this could hardly omit mention of Alan Baker's (Deutsche Morgan Grenfell and LBMA Chairman) contribution on How the Market is Responding to New Forces. Although he admitted to some difficulty, in current market conditions, in identifying those new forces, his analysis of the development of the market led him to the conclusion that the market had grown in depth, sophistication and stability.
Producers, he maintained, could only be grateful for a market which over the past three decades had absorbed a steadily increasing level of supply. Consumers had enjoyed a price stability in which their businesses had flourished. And central banks could only be happy, as they sat on their golden eggs, with a market which caused them no sleepless nights - for the moment!
This brief survey hardly does justice to the range of topics covered. But my guess is the same issues will be the live ones al the same time next year. We look forward to Prague!