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THE
NEW GOLD ACCORD I see the renewal of the European central banks' gold sales agreement as a positive for the gold market. Here's why. When you look a the supply demand tables, the one thing that stands out clearly is that mine production is static in the 2,200-2,600-tonne range and has been for almost a decade. Given the statements of industry stalwarts, it doesn't appear that the production is going to improve any time soon. Exploration budgets were cut to the bone during the quiet years, and it takes upwards of seven years to bring a known deposit to production. Scrap is another constant in the 600-tonnes-per-year range. Meanwhile gold usage is on a steady growth curve from 3,400 tonnes in 1994 to 4,000 tonnes per year now. That gap between mine-plus-scrap production and usage must be filled. But how? In years past most of that gap has been made up through mining company forward sales programs, central bank sales, and net disinvestment. Now forward sales programs have gone to the other side of the ledger with the advent of dehedging. For example, in 1997 hedgers were responsible for bringing an extra 470 tonnes "supply" to the table. In 2002 they bought back 420 tonnes and showed up on the "demand" side of the ledger. That's a 890-tonne turnaround! I disagree with the analysts who are saying that producer buy-backs will slow down or even disappear. This doesn't square with the hefty hedge books some of these mining companies will be burdened with as the price rises. If anything, I see even more de-hedging in the offing -- and the tonnages, I believe, will come as a surprise. Today's announcement is important from another perspective. Let's keep in mind that all this started many years with a plea from N.M. Rothschild for more "transparency" in the gold business. The representative of Rothschild might well have used the word "predicablility" because that's what they were after. We now know that 500 tonnes will be coming on the market annually over the next five years from official sector sales and NO MORE. What's more the lease pool remains capped at the 1999 number. With investment demand -- the big X factor heating up globally in the face of a dollar problem -- appearing increasing intractable, this cap on the supply side of the chart will figure mightily in the thinking of both long-term hedgers as well as speculators in the hedge funds and big bank trading departments. One London trader was quoted a few days ago as saying that he wasn't concerned about the rise in sales from 400 tonnes per year to 500 because the market needed the supply. I concur. In fact, I believe the market could have withstood 700-800 tonnes per year without a blink in the current environment, and there is a possibility that the market will come up woefully short under these circumstances -- a prospect likely to be reflected in the price. Watch out for a delayed positive reaction or a protracted upturn in the gold price as a direct result from today's announcement. The losing position will continue to be on the short side of this market and I think the players know it. The next phase of this secular bull market will display a strong and incessant undercurrent of physical demand with some nations seeking to bolster their official-sector holdings and some of the smaller central banks pressuring the bullion banks to have their gold deposits returned.
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